The tides have been changing in the real estate market, bringing new opportunities and challenges.
Inflation has soared, interest rates have climbed, and concerns over a recession remain, it’s no surprise to hear the real estate market is changing. Thanks to shifts in consumer preferences, changes in supply and demand, and the emergence of new real estate investment opportunities, the coming years could look a lot different than the years prior.
Motley Fool asked three contributors what they feel is next for the real estate industry, including the biggest opportunities and hurdles for investors to prepare for in 2023. Here’s what they said.
Residential real estate
Liz Brumer-Smith: After two years of unparalleled rental and home price growth, it’s becoming abundantly clear that the era of the red-hot seller’s market is coming to an end. Active listings increased 2022, and existing home sales consistently decreased for months, marking the biggest jump in home price reductions since the start of the pandemic.
The cooldown is undoubtedly thanks to rising interest rates. Rising mortgage rates have made the already richly valued homes in many markets unattainable for a growing number of Americans. A recent report from ATTOM Data Solutions found that home affordability declined by 97% in the 575 counties it tracks.
Lower housing affordability will also mean that rental housing will continue to play an increasingly important role in the housing market, with rental rates likely maintaining their steady growth.
For early 2023 it’s unlikely home prices will revert, but rather grow at a slower rate. Some sellers may reduce their prices in less competitive or supply-strapped markets, but there is still a notable shortage of housing supply that will continue to put pressure on prices.
Investors should use caution if they are relying on home price appreciation as part of their investment strategy and instead look for investments that prioritize cash flow through rental income. Many companies in the multi-family apartment sector are still seeing incredible rental growth and demand with occupancy levels nearing all-time highs. And given the stock market volatility, it makes it an extra advantageous time to invest in rental properties.
Mike Price: The long-term case for investing in farmland is clear: The amount of arable land worldwide is falling and the number of humans needing to eat is rising. This creates a reduction in supply and an increase in demand. The short-term case is fuzzier.
Most likely, farmland will continue to do well over the next six months as long as inflation stays high. When food prices go up, owners of farmland make more money and require more to sell the land. According to the Bureau of Labor Statistics, the May 2022 food-at-home price index rose 11.9% over the preceding 12 months; that’s the most it has risen over any 12-month period since 1979.
The Fed is “working” on it — there were several rate hikes this year — but so far, there’s no end in sight for inflation. According to the NCREIF, total farmland returns were around 7.8% in