An Honest Look at the State of Real Estate

The residential real estate industry hasn’t been this slow in almost 30 years, but things were quite a bit different back then.

First of all, there were 75 million fewer people in the U.S.

Second of all, the median single-family home was $274,000 cheaper. 

Although things were cheaper back then (even when accounting for inflation), transactions were slow because there was too much supply and too little demand.

Today, quite the opposite is true—there’s far too much demand for far too little supply, which is why asking prices are staying high even as elevated interest rates push millions of prospective buyers out of the market. There were only about 4 million home sales in 2023, a 19% decline from 2022, and a 33% decline from 2021.

In residential, the news is better for sellers than buyers

Even though we’re only a few weeks into the new year, interest rates are well below their October highs, dropping from over 8% to about 6.5% so far. 

While lower rates will loosen the golden handcuffs of some owners (bringing more supply online and helping first-time buyers better afford a purchase), too many negative market conditions remain to deliver meaningful impact. These conditions all but ensure 2024—despite being an improvement over 2023—will be an underwhelming year for those of us tethered to the residential real estate industry. 

I hate to say it to my friends looking to buy but prices aren’t going to decline in 2024—they’re going to go up, up, up. Dropping financing costs, strong demands, and minimal increases for both new and existing home supply mean sellers will continue to have an iron grip on the residential market. The only way to meaningfully loosen that iron grip and ease pressure on prices is to see home inventory skyrocket, but the reality is that won’t happen. 

(By the way…for those of you who’ve been in your California home since at least 2019, you’ll be happy to know home values have increased by an average of 40% statewide in the last five years.)

Things will be slow for mortgage brokers

For my friends in the mortgage writing business, 2024 isn’t going to be a good one. Applications will remain well below their 2021 peak and they may even decline further from 2023’s trough. However, if rates can come down to between 5.5% to 6% by year’s end, you might see applications and originations trending upward.  

In commercial, owners and sellers are getting hammered

You heard it in the news time and again last year—owners and sellers are getting hammered, with vacancies in office buildings and other commercial spaces floating anywhere from 15% to 30% in major cities. By some accounts, foot traffic in big-city commercial centers (i.e. downtown) is down more than 70% from 2019. Commercial transactions (be they leases or sales) are especially slow in urban areas with industries that allow for remote or hybrid work (e.g. San Francisco). 

While more companies are flexing on their employees to get back in the office at least a couple days a week, the truth of the matter is the COVID-induced office exodus is still very much in effect. 

But what’s really interesting here is that the commercial problem (likely) hasn’t peaked yet. As bad as a 20% or 30% vacancy rate sounds, vacancy only accounts for space that isn’t under contract. Space that is under contract—even if it’s currently vacant and unused by a business—doesn’t count towards the vacancy rate. That means commercial vacancy in major metropolitan areas like Los Angeles and San Francisco might be closer to 40% or 50%, which is insane! As a result, the people who own major commercial buildings are losing their collective shirt at the moment, be they individual owners or collectives such as BlackRock. To get a clearer idea of just how deep the downturn is for commercial, look at these two premiere urban properties purchased at steep discounts in California’s two best real-estate markets:

• The famous Huntington Hotel in San Francisco sold in 2018 for $87 million—last year it sold for $29 million. 
• Aon Tower in Downtown LA sold for about $148 million last year—it sold for about $215 million in 2014.

What’s going to happen in commercial real estate—especially office-based commercial—in 2024 is muddled at best. So much is dependent upon how businesses not only draw up their post-COVID work-from-home policies, but also how they enforce those policies. High-value Class A office space should see strong demand this coming year, but it’s less desirable Class B and Class C office space that will continue to suffer more than anything else. 

That being said, it’s not all bad! While commercial as a whole will remain down in the doldrums, there are small pockets that will show improvements. For example, small-scale commercial properties focused on neighborhood retail will improve in the year ahead, providing the owners of said commercial properties with reliable tenants and income.

In closing…

For those with very deep pockets and a penchant for buying large commercial properties, 2024 will be a banner year. 

Similarly, for those looking to cash-out on the big-time equity they’ve gained in their primary residence and relocate to an area with a much lower cost of living, 2024 is going to be a good one.

But for the rest of us, this year will fall somewhere between stagnation and struggle.

Interest rates will stabilize, but remain higher than many of us would like (or can afford). 

Inventory might improve for both existing and new-build homes but not by a large enough margin to make a meaningful dent in the supply shortage, keeping prices higher than they should be. 

Of course, I could be wrong.

Perhaps the housing supply increases by more than we anticipated or white-collar workers will start returning to the office in droves…but I just don’t see it happening.

Whether you’re interested in learning more about the residential or commercial side of real estate, I’m here to help. The sooner you reach out to me with your comments, questions, and concerns, the sooner I can help you along your real estate journey. 

So, with that said, give me a call at 310-853-0335 or shoot me an email at ShannonShue@KW.com.

Talk soon!

-Shannon