How the Housing Market Will Impact Class B Apartments – EP 290

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A lot of people want to buy houses–and a lot of them are saying, “Prices are overheated. Interest rates are going to go back down, and I’m going to wait it out.”

Unfortunately, that’s not going to work. And the reason is because of supply and demand.

In today’s episode, I walk you through the hard numbers to show why the housing market is all but guaranteed to stay hot for years to come, even if we experience a significant economic downturn.

You’ll also learn why people who get boxed out of the housing market will be very interested in Class B suburban apartments–and how this is creating great opportunities for investors and operators.

Key Takeaways with Josh Cantwell

  • How simple supply and demand indicates that the housing market isn’t going to cool off any time soon.
  • Why I expect that supply will continue to be less than demand, even if rates continue to go up, for years to come.
  • The great opportunities that are being created for owners and operators of B class apartments in the suburbs.

Josh Cantwell Tweetables

“With no supply, higher prices, higher interest rates, meaning more and more people are going to want a home. And that is going to create more demand for B-class suburban apartments than ever before.” - Josh Cantwell

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Josh Cantwell: Hey there. Welcome back to Accelerated Real Estate Investor with Josh Cantwell. I’m your host, and today, I want to talk to you about buying a house. Many people are saying, “Hey, I think I’m going to sit on the sidelines. I’m going to wait for prices to go down. Prices are overheated. It’s 2007, 2008, 2009, all over again. I’m going to wait. Prices are going to go down. Interest rates will eventually go back down. I’m going to wait and I’m going to buy a house.”

 

Let me tell you about that and why that isn’t going to work, and also, the impact on multifamily B-class suburban apartments. You see the one thing that makes house prices go up or down, the one thing, the only thing is supply and demand. You see, when the economy is really good and interest rates are low, people want to buy, buy, buy, buy, buy, prices go up, up, up, up, up. So, people are thinking, hey, if there’s a bad economy, if we’re in a recession, if there’s a high-interest rate economy, then prices should go down.

 

And so, let’s talk about the difference between feelings and data. Feelings, my feeling is we’re going to have a bad economy. We’re going to have a high-interest rate economy. Prices are going to go down versus the data. Okay, so let me give you some data from some different videos I’ve been watching, some different research that we’ve been doing from Auction.com and from Marcus & Millichap and from CoStar, all these different places.

 

So, right now, there are 4 million more 35-year-old people in prime house-buying age. There are 4 million more 35-year-olds than in 2007. Right now, there are 128 million households. Household meaning people who are living together, could be husband or wife, could be partners, could be boyfriend/girlfriend, could be single mom with kids. Whenever it is, 128 million more households right now than there were in 2007. There are 12 million more households operating that need a house today than there were in 2007, 15 years ago.

 

Also, in 2007, there were 2.1 million new housing starts, meaning there were contractors, there were builders that were building more homes. Today, there are 1.4 million housing starts, so there are 700,000 less housing starts today than there were in 2007. And if you think about it right now, there are about two to three months depending on where you get your data, two to three months’ worth of supply on the multiple listing service, on the MLS. A normal market is nine months of supply where it’s not a buyer’s market, it’s not a seller’s market. It is a normal market and even market if there are more than nine months of supply that’s considered a buyer’s market. If there’s less than nine months’ worth of inventory, it’s a seller’s market. Right now, there’s only about two to two and a half to three months’ worth of inventory on the market. And so, there’s significantly less supply.

 

So, remember, the only data that matters is that demand outweighs supply. If that’s the case, prices will go up. One of the ways that you temper demand is by raising interest rates. So, the Federal Reserve is saying, “Hey, we’re going to raise interest rates, we’re going to try to temper demand.” The problem is, is that people will continue to buy houses even in a higher interest rate economy because there are these 4 million 35-year-olds that are now in prime buying age. There are 128 million households more than in 2007. There are only 1.4 million housing starts versus what we had in 2007, 2.1. There’s only two to three months’ worth of supply. We need to get to nine months’ worth of supply to be at an even market. In an even market, prices still go up.

 

So, think about this. House prices went up 32% in the pandemic year of 2020. House prices went up between 15% to 19% in 2021, last year, and prices are already up 7% in 2022, and we’re only halfway through the year. And so, if you look about this household formation, all these millennials that were born and everybody kind of joking around, the millennials are living in their parents’ basements, well, think about it, those millennials that were born 15 years ago at age 20 right in the middle of the last major recession of 2007, 2008, 2009, they’re now 35 years old. They’ve seen nothing over the last 10 years except growth, growth, growth, growth, growth, they’re ready to buy a house.

 

So, I’m predicting that every year for the next three to five years, we will have less supply than demand even if interest rates continue to go up. And so, since demand is going to be greater than supply, house prices are going to continue to go up for at least the next three to five years. So, think about this. As houses continue to go up in price and interest rates continue to go up because the Fed’s trying to slow down the economy, more and more buyers are going to get boxed out of the market even though there is demand. There’s not enough supply, prices are going up, interest rates are going up.

 

So, no supply, higher prices, higher interest rates, meaning more and more people are going to want a home. They can’t afford one or can’t get one. And that is going to create more demand for B-class suburban apartments than ever before. And if you’re in a market like mine in the Midwest, where they’re not really building a tremendous amount of suburban apartments, especially in the Cleveland area where I’m at, buying those workforce housing B class in the suburbs and improving it is better than building it.

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