Going by the latest headlines, the real estate market must be trouble, right?
“U.S. Home Sales Dip 15 Percent Annually in August.”
According to the National Association of Realtors, existing-home sales moved lower in August 2023. Year-over-year, all four major U.S. regions – the Midwest, Northeast, South and West all saw year-over-year sales declines. Higher mortgage rates are being blamed for the decline.
As humans, we have the natural tendency to jump to conclusions. We read a headline that U.S. home sales dipped and our natural response is to generalize. Well, if home prices dipped, it must be time to stay away from real estate altogether is the knee-jerk reaction from many investors. However, if you read between the lines and dig a little deeper, you’ll find opportunities where others see danger.
Here are my two favorite quotes for going against what everyone else is thinking:
“The time to buy is when there’s blood in the streets.” -Nathan Rothschild, a 19th-century British financier and member of the Rothschild banking family.
“Be fearful when others are greedy, and greedy when others are fearful.” -Warren Buffett
The lesson to be learned from the latest pessimistic headlines about the housing market is not to clump all real estate sectors into the same basket. The COVID-19 pandemic is the clearest and most recent example of how not all sectors respond to a downturn in the same way.
While nearly every sector was down in the early days of COVID in 2020, two sectors stood out: industrial and multifamily. Industrial saw gains as the direct beneficiary of e-commerce resulting from widespread shutdowns and social distancing. While hospitality, office, and retail all suffered significant downturns, multifamily stood firm and demonstrated its long-term resilience.
According to CBRE’s 2022 U.S. Real Estate Market Outlook, multifamily made a quick recovery from the COVID-induced recession in 2020, finishing 2021 with overall occupancy and net effective rents above pre-pandemic levels. While certain markets have faced challenges, the overall health of the multifamily segment led to a record 2022 despite inflation. And therein lies the secret to multifamily’s resilience. No matter the market conditions, there is always demand for multifamily.
Multifamily demand is one of the leading reasons smart investors rely on this sector for inflation and recession-insulated cash flow and growth. While revered forecasters and prognosticators stumble, the numbers never fail investors. Multifamily, specifically the mid to affordable segments, has consistent and ongoing demand because they fill an essential need.
Everyone needs shelter, food, fuel, and transportation.
Historically, in a downturn, residents downsize from homeownership to multifamily rentals to save money. Most recently, particularly in the past couple of decades, multifamily has also seen increased demand even when the economy is good. That’s because the cost of homeownership has become increasingly out of reach for many aspiring homeowners. This has resulted in demand consistently outstripping supply since the Financial Crisis. The gap has only widened as the cost of homeownership has gone up with rising interest rates.
New home sales and existing home sales do not represent the entire real estate market as a whole. Single-family housing is only a subset of the entire real estate market, and the single-family housing rental market is an even smaller subset of the commercial real estate market. So, making generalizations about the entire commercial real estate market based on the performance of the housing market would be a mistake.
Don’t be afraid to read between the lines and dig deeper.
When the market is shifting, ask yourself where it is going. Something’s gotta give. If people aren’t buying homes, then what are they doing for housing? The answer has always been multifamily rentals – now more than ever, in fact, as the cost of homeownership continues to become increasingly out of reach for so many Americans.
While the average investor follows trends and latches onto hype trains, sophisticated ultra-wealthy investors follow demand for uninterrupted cash flow ideal for hedging against the loss of income. Follow demand, and you’ll find yourself investing in a resilient asset class that has not only weathered both the Financial Crisis and COVID but is standing tall in the face of record inflation and historic market volatility and uncertainty.
Multifamily not only survives but actually prospers during tumultuous times like the ones we are currently experiencing. Allocate to cash-flowing multifamily rentals like the ultra-wealthy, and you’ll discover an asset class that generates consistent income and appreciation insulated from downturns and inflation.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.