Market Report
How Real Estate Will Surprise Us in 2024
By Carole VanSickle Ellis
At the start of 2023, many real estate analysts expected the year to bring a “return to normal” for real estate the same way many Americans had hoped for a “return to normal” following the COVID-19 pandemic lockdowns in previous years. However, as the year progressed, real estate trends clearly showed “normal” might not look quite the way it used to, and many predictions fell short or completely awry of reality by the fourth quarter of the year.
For example, in February 2023, the industry was rife with predictions that the number of homes for sale nationally would rise by nearly 23% by the end of this year due to longer times on market, but instead, home sales fell by just over 22% during the first half of the year; inventory remained incredibly tight in most markets, and properties listed continued to sell within about 20 days (national average). Only about a quarter of listed real estate remained on the market for more than a month.
In 2023, the only truly predictable element about the market remained, as always, that real estate investors would figure out new and innovative ways to generate returns in the sector and that the post-pandemic world would be largely unpredictable.
“Investors have to remember that the real estate market is a dynamic entity that is constantly evolving in response to economic, social, and environmental factors,” said Gary Harper, CEO of business coaching and consulting firm Sharper Business Solutions. “Adapting to change is crucial for success,” said Harper, who specializes in in systems and process management and has been investing in real estate since 2004.
“People kept using the word ‘reset’ [in 2022], and it was a good word but it does not mean exactly what it used to,” said Bruce McNeilage, co-founder and CEO of Kinloch Partners and Kinloch Homes. “Things can turn extremely quickly, and investors have to always be on the lookout for the next market where their numbers make sense and where you can get the best margins.”
At the start of 2023, McNeilage’s build-to-rent (BTR) development company was moving into tertiary markets where the competition was not quite as steep and land and labor remained relatively affordable. He expects to see most of his inventory sell to other investors in these markets within five years due to an ongoing lack of attractive housing inventory.
“The market for renters and homeowners has changed,” he explained. “People want larger homes with five bedrooms so there is room for remote work and other things that they did not require in a home pre-pandemic. Today, we are almost exclusively building four- and five-bedroom properties in our neighborhoods because that is what people want to rent.”
Rising Interest Rates & a Noncommittal Fed Make Traditional Homebuying Difficult
In November 2023, many experts happily predicted that two interest-rate-hike pauses in a row from the Federal Reserve could mean that rising interest rates could finally be at an end. If this were the case, many homebuyers hope interest rates might start to fall again soon in order to render homes more affordable.
In reality, however, a pause in rate hikes does not mean a return to affordability any time in the near future. As Keith Gumbinger, vice president at mortgage website HSH.com, told Forbes in November, “While not meaningless, another quarter-point hike at this point will not change the big picture much as a lot of the ‘damage’ from higher interest rates is either done or already in process.” He emphasized rate cuts are the key to substantial reversals in problematic trends in housing affordability for buyers.
As usual, the Fed remains relatively tight-lipped about its plans for 2024, although many policy-trackers say they believe further tightening is probable in the coming year. Mary Daly, president of the San Francisco Fed, described the process of deciding what to announce or “telegraph” to the public about Fed plans and policies “the hardest phase of policymaking” because, as she described it, “When you do not know exactly what will be needed, it is not actually a terrific idea to telegraph one thing or the other…. I don’t want to be in a position where we have said definitively we are not going to do X, and then X is needed.”
“We anticipate that rate decreases could encourage buyers who have been sitting on the sidelines to enter the market because they are attracted by the idea of lower interest rates,” Harper chimed in. However, he noted, more buyers will certainly create even tighter inventory environments in many markets. At present, the Fed does not appear likely to lower interest rates even if it continues to hold on raising them, and investors implementing creative financing strategies that enable them to make higher offers, close quickly, or offer accessible borrowing terms to would-be retail buyers will likely find themselves in high demand in 2024 regardless of how the interest-rate conundrum resolves.
Dennis Cisterna, co-founder and CIO of Sentinel Net Lease, believes interest rates will remain firmly in place in 2024 despite other analysts’ predictions to the contrary. “It is going to make 2024 an incredibly slow year,” he said. “There is just too much demand and not enough product.”
Christopher O’Neal, an investor, coach, and agent based in Virginia, warned that devaluation of the dollar in 2024 could also represent a curveball for every facet of the market. Since the end of World War II, the U.S. dollar has been the world’s principal reserve currency, but ongoing global conflicts in which the United States has played a role via sanctions, financial and military support, diplomacy, or some combination of these has led some countries to begin what the Council on Foreign Relations (CFR), a nonpartisan think tank and publishing house founded in 1921, described in a July 2023 report as “de-dollarization” in order to preemptively counteract sanctions and their indirect fallout. Although CFR analysts stated firmly they believe it “unlikely” that the dollar will be replaced in the near future, O’Neal warned that it could result in increased scarcity of available housing and market volatility.
“People get scared when wars start,” O’Neal said. “If devaluation continues, it will definitely make the economy and the real estate market more volatile.” He went on to say that even when international conflicts are not staged on American soil, as tension rises abroad, it becomes more likely that people and, by extension, markets, will feel the effects at home. “Even if interest rates remain steady or go down, market solidity is increasingly jeopardized with every international conflict,” he concluded.
Artificial Intelligence Will Gain Market Influence, but Not How You Expect It To
In this day and age, it is impossible to make market predictions without at least mentioning the role of artificial intelligence (AI) in the industry and in predictive analytics themselves. An increasing number of real estate professionals and investors rely heavily on AI-driven predictive analytics to create property-trend forecasts, price predictions, and demand predictions. Property management and listing companies have begun depending on AI to help with risk assessment and fraud detection as well.
It is indisputable that this trend will solidify in the coming year, but what may surprise investors is how quickly AI becomes an integral part of the transactional and logistical sides of real estate investing.
“AI and PropTech will advance at a much more accelerated rate [in 2024] than has been anticipated,” said Monick Halm, founder of the women’s real estate investing education company Real Estate Investor Goddesses and an experienced single- and multifamily investor. She added, “This will lead to transformative changes in how real estate transactions are conducted and who remains competitive in the new environment. Investors and professionals who embrace and adapt to AI-driven technology and other technological advances will find themselves at a significant advantage in the evolving real estate landscape.”
Halm compared the effective, efficient use of AI to “having a superpower that uncovers market trends and investment opportunities.” However, others in the industry warn that AI’s adaptive technology could create pitfalls for the unwary and overenthusiastic.
RealtorMagazine contributor Melissa Tracey warned this past July that there are legal pitfalls to using AI, including potential copyright infringement, data inaccuracies Tracey said could potentially be significant enough to constitute violations of the Realtor Code of Ethics, and legal complications associated with the use of AI to draft or modify standard forms, contracts, and even educational “advice” content for clients in some states.
In October, President Biden also signed an executive order invoking the Defense Production Act in order to create clearer guidance for how AI may be used in any industry, citing documented examples of AI reacting to user verbiage in ways that created dangerous scenarios, including “discrimination, bias, and other abuses in justice, healthcare, and housing.” Investors using AI must be alert to changes in national and local regulations surrounding this rapidly evolving technology.
If Halm’s predictions prove correct, it will be imperative that every investor monitor how AI-created materials and data affect their daily operations, particularly in terms of property valuation, customer service, and property management. “Reliance on AI raises concerns regarding data privacy,” said senior vice president of business development Wade Vander Molen. He continued, “Security…[and] additionally, the ethical implications of AI, such as fair housing practices and avoiding discriminatory algorithms, require careful attention.”
Getting Paid & Generating Returns in 2024
Perhaps one of the most reliable elements of real estate is, for most investors and professionals, getting paid and generating returns. While the amounts may vary, real estate is one of the most reliable and proven methods of generating wealth and income throughout history. However, said Pam Goodwin, CEO of Texas-based Goodwin Commercial, changes to commission structures in both commercial and residential real estate coming in 2024 could dramatically reshape how the industry interacts with agents and how agents and investors get paid.
“With the current Sitzer/Burnett class action commission lawsuit regarding the residential buyer-broker commission fee, agents in residential and commercial will likely see the industry’s commission structure reshaped in 2024,” Goodwin said. At the end of October, this trial concluded with a Kansas City jury finding NAR, HomeServices of America, and Keller Williams all guilty of “collaborating to inflate or maintain high commission rates” via NAR rules and regulations. Readers should be aware that all three defendants are appealing the ruling and have stated unequivocally that the charges and verdict are inaccurate and untrue. Two other parties settled prior to the decision without admitting wrongdoing.
Goodwin predicts this verdict will likely reduce the overall number of real estate agents nationwide, inducing buyers to work directly with sellers’ listing agents and sellers themselves. She also predicted traditional commission structures could undergo a total overhaul in the next 12 months even if NAR and other defendants move forward with appeals.
Of course, one thing we can be sure of is that real estate investors will figure out new and unpredictable ways to combat any market’s challenges no matter how big the changes are around them.
