Hello my friends. Welcome to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli. And I first of all just want to make a quick apology for taking a break. I was deeply involved with a number of projects here for a while, and it took me away from a lot of the things I normally did and the podcast being one of them. So I am now slowly but quickly getting back on track to recording a regular weekly podcast episode. We’ll still have our Throwback Thursdays, and I’m looking at some other ideas to introduce into the show. Also, have a great guest coming up here in the next couple of weeks. Haven’t interviewed ’em yet, but it will be pretty interesting episode.
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So for today, I wanted to take a look at the 2025 housing market and what I see as predictions, if you will, or what may be coming up.
I don’t have a crystal ball, nobody really does, and I say this literally every year, but let’s break down what 2025 has in store for real estate investors. Will interest rates drop? Will home prices stabilize? And where are the best opportunities for growth? If you’re a seasoned investor or you’re just getting started, this episode is perfect for you. It’s gonna give you some insights to help you navigate the market. So stick around as we discuss mortgage rates, rental demand, regional hotspots and investment strategies to help you maximize your returns this year in 2025. So let’s begin with where the market stands now, before we look ahead, let’s review some key trends that were shaping the market as we entered into 2025. And so we’re a little bit into the year now, but if you look at mortgage rates, they remain pretty much elevated. You know, we were spoiled for years with interest rates, mortgage rates specifically in the threes and 4% range.
Now they’re currently hovering, depending on what you’re looking at, the type of loan and, and the location that you’re in. At mortgage rates that are somewhere around 6.5 to 7%, I mean, there’s a wide spread, six to 7.5%, but regardless, they remain elevated in the 6.5 to seven, seven point half percent range. And you know, they’ll probably stay that way for a little while. The Fed has slowed interest rate hikes. They were dovish for a while, and now they just seem to have taken their foot off the gas pedal. I think this is gonna be temporary, but I do foresee mortgage rates coming down a little bit more as the year progresses and then into the new year as in 2026. So I don’t expect them to go up, but I do expect them to come down slightly and moderately. But you know, these high borrowing costs, they’re still impacting investors because now you have to underwrite your properties knowing that your debt service is gonna be more expensive than it was, let’s say two years ago.
And that’s okay. There’s deals out there all the time. Like I say, it’s not about when to buy investment real estate, it’s about where to buy it. There’s always deals out there every single day of the year. It’s just about the markets, the areas, the neighborhoods. And of course, you know, different conditions like, you know, sellers who are looking to offload property because they’re just done with it or they’re moving on or they’re doing a 10 31 exchange or maybe they’re a distressed seller, whatever the case is, there’s, there’s all kinds of deals out there all the time. Now, investors who are using leverage need to be more strategic about their financing. So again, you have to factor in the fact that mortgage rates are higher by two to 3% more than maybe when you were first looking at acquiring rental properties a couple of years ago 2, 3, 4 years ago.
The numbers were so different, but you also have to keep in mind that rents have also appreciated through inflation considerably since 2020, even pre covid, but definitely since 2020. So we’ve seen some rapid inflation in rents just generally speaking across the country. So rental rates have increased considerably. They have kept pace with the increase in mortgage rates, not quite as much as the appreciation rates in many markets around the country. They still lagged behind. This is why you saw the rent to price ratio drop. You know, there was a time, let’s call it 10 years ago, where, you know, the, the rule of thumb was the 1% rule, and that is that the monthly rent was about 1% of the purchase price. Well, that still exists today, but it’s far harder to find and it’s definitely less common. Now. You can find it if you want to drop the quality of the neighborhood you’re in, the quality of the neighborhood, what I call a neighborhood grade.
If you’re dropping from let’s say a B plus to a BAB to a B minus, or let’s just say a B minus to a c plus, you are, you’re going to naturally see that rent to price ratio increase. But is that the trade off that you want? I don’t necessarily recommend or suggest that you downgrade in the quality of the neighborhood because you are taking on potentially increased risk, if you will, or issues or problems with the demographic of that tenant base. I’m not saying they’re bad, I’m just saying that they tend to have greater issues in terms of vacancies, late payments, missed payments, you know, cutting back on their longer lease terms to shorter lease terms, sometimes leaving before their lease is over. Sometimes, you know, this may be anecdotal, but leaving more trash or damage behind as you, you turn your property over from one tenant to another.
Now that doesn’t happen all the time, but you tend to see it more in D class versus C class and C class versus B class neighborhoods. It’s just, it’s just a demographic thing and I really can’t get into the psychology of it or the sociology or psycho sociology of it. It’s, it’s just something that we just know. And you can talk to virtually any property manager and they’ll tell you the same thing. It’s just something that is the nature of the beast. So that’s a little bit about mortgage rates. They remain elevated and, and they’ll, they’ll stay that way, but they’ll gradually come down. Now, home prices, home prices have stabilized and they continue to stabilize. I don’t think we’re gonna continue to see the rapid price appreciation that we saw. Now, while appreciation has slowed, home values remain still relatively high due to tight inventory.
I’ve talked about this a lot. Inventory still pretty tight, especially in the southern states, the Sunbelt states, there’s just a lot of demand and a lot of people moving south into these areas, creating a tremendous amount of demand. Builders are doing their best to keep up. They’re in a good position, they’re putting out as much inventory as they can. Things have slowed down, prices have moderated, it’s stabilized, but we’re still seeing tight inventory. Now, some overinflated markets like Boise Idaho, Austin, Texas, Phoenix, Arizona, you know, they’re seeing slight price corrections right now because there was a period of rapid building. And I’m not gonna say that they’re overbuilt. I mean, that may be the case. I haven’t seen the data on it lately, but price appreciation has certainly slowed down because these markets have become somewhat overinflated. And despite affordability concerns, demand for housing still remains strong across the country, generally speaking, and certainly very specifically in markets all around.
So this is what is preventing a market crash, quote unquote, if you will. It’s, it’s the fact that we still have strong and ongoing demand for the inventory, the housing stock that we have in this country. And builders are building what they can. A lot of people aren’t moving. A lot of people are locked into lower mortgage rates, relatively speaking to where mortgage rates are today. So it doesn’t make sense for them to move because if they move and have to get a new mortgage loan on another property, even in some cases, if they’re downgrading from what they’re moving from, often they’re monthly debt service, meaning their monthly mortgage payment will be higher if not the same than what they’re paying now. So they want to stay put. That means they’re not freeing up any housing stock for others who are looking to move into their property because they may have been moving out into another property or moving up into some other property, taking up another new housing unit from a builder.
So keep an eye on home prices they still will remain strong. Now, there is limited inventory that is driving demand. Many homeowners are locked into these ultra low mortgage rates, as I was just mentioning, and they’re unwilling to sell. So they’re basically staying put. And this is a very large percentage of the US population. And the housing stock builders have ramped up construction quite considerably all over the country. I mean, not just the Sunbelt states, but literally everywhere. So supply still lags behind demand. This has been going on, not for months, not for years, but for many, many years. In fact, you could probably roll this back as far as 2012, which was kind of like at the trough of the last major market cycle. We were building like crazy up until 2006 and into 2007. And that’s when things just kind of took a dip.
You know, we mortgage credit dried up and, you know, the housing market kind of hit the skids and that’s when we basically fell off the cliff and people were over leveraged. And a lot of people were left out to dry, you know, just in their shorts and they were, you know upside down on properties all over the place. And many of these people were speculators. And that created or led to the great recession of 2008. And then, you know, there was a reconciliation period for a few years and then we kind of bottomed out in 2011, 2012. That was an ideal time to buy, but that’s a macro cycle. So, you know, inventory is still pretty tight and that limited inventory is driving demand. I guess the other comment I can make is the resale market, you know, not new construction, but existing inventory.
The resale market remains tight as well. I mean, that’s really the main market builders are just creating new construction, new new inventory to bring onto the market. But the resale market has remained tight for a long time. It continues to stay tight and it’s leading to a very much more competitive, more competitive environment for investment properties. And this is why often if you’re in that sweet spot or the bell curve of what investors are looking for, where there’s the right balance between price and rent, so the properties can cash flow, even if they’re fully leveraged at 75 or 80% loan to value. What you’re finding is that there are often in some places and in some cases multiple offers on properties, multiple bids. So that resale market has remained tight for a long time. It continues to remain tight, it’s led to a, a more competitive environment.
And it’s really just more competition for investors with investment property. But you know, if you’re, if you’re doing this on your own, you’re working with a real estate agent or a broker or you’re just kind of farming or combing areas, that’s all well and fine. It’s just a matter of time before you find you know, the right deal that makes sense for you. And sometimes you’re gonna have to be submitting multiple offers. If you’re working with a firm like like our company Real Estate Investments, and you are working with one of our team members, our investment counselors, you know, they already have a pipeline of available turnkey rental property, they can make that available to you so you don’t have to search, find, sift, negotiate, et cetera, et cetera. So something to just keep in mind. The the next area is what I’m gonna call the rental market growth area.
Again, you know, we’re kind of focused on 2024 leading into 2025, but the rental market growth continues. High home prices and mortgage rates are keeping, many would be buyers in the rental market. And this is great for us as real estate investors because renters will be renters, renters will stay renters. That rental stock, the tenant stock if you will, that tenant pool will remain large and strong. Rent prices have increased, especially in cities where supply is tight. And so we’re not seeing renters moving into home ownership. Renters are gonna stay renters because they’re being forced to be in the rental pool because mortgage rates are elevated and that means affordability is low and they just aren’t able to move into their own property or move out of that rental pool. So again, this is good news for investors holding rental properties as demand remains strong.
And if you are looking to, you know, start investing in real estate or grow your portfolio, great, we want to help you. And that just means that you’re gonna be acquiring properties even though they’re a little more expensive, relatively speaking than they were before. You know, all else being equal, you’ve got lots of tenants, a strong tenant pool to draw from, strong rental demand and rents going up year after year after year consistently and in some pretty healthy single digit numbers in many places. So with these factors in mind, let’s shift and talk about where the market is headed. So the 2025 housing market prediction for what I’ll call real estate investors is basically this. And again, this is not a crystal ball thing, I can’t guarantee anything. This is kind of where I just see things going. So mortgage rates, as I mentioned before, will decline, but I foresee and predict them staying above 6% this year.
The fed may cut rates in 2025 once or twice, but mortgage rates are unlikely to drop below 6%. So investors looking to finance purchases should expect rates to be in the low to mid 6% range by the end of the year. So don’t wait on the sidelines. Think about this, what you’re going to save in waiting for mortgage rates to drop, half of a percent, even 1%, but half a percent is gonna be far outstrip by the opportunity cost of you waiting on the sideline and not making the move to get on the equity train, meaning into the rental market and purchasing that next, or those next two rental properties. Also, alternative financing options like seller financing and subject two deals. They’re out there not as common today as they used to be because people are just staying put, but they will become more popular as time goes on because mortgage rates are still gonna be, you know, in that 6% range.
Again, you know, it’s, it’s that old saying, don’t wait to buy real estate. Buy real estate and wait. It’s just such a powerful saying because once you start building a real estate portfolio and you wait a few years or a number of years or a handful of years, it’s very interesting to see what happens. Your rents go up, cash flows go up, your equity goes up, you know, your debt service stays the same while your mortgage goes down the principle and, and accelerates year after year. ’cause That’s just the way mortgages work. So, you know, keep that in mind. You just want to continue to build your real estate portfolio till you get it to where you’ve reached your goals. Now the next thing is home prices, as I talked about before, you know, they will stabilize not crash nationwide price growth will likely continue, but it’s a, it’ll slow down.
I don’t like talking about things on a national basis, but, you know, on a national basis annually, we’re probably gonna see two, three, 4%, but there’s still gonna be markets, especially in high demand and desirable markets where appreciation rates will probably see 4, 5, 6, maybe even 7% or more. That’s not going to be uncommon, but it’s not gonna be as crazy as it was in 2020 and 2021. Certainly, you know, it, it slowed down in 22 and into 23. That’s just the way the market works. You know, when you have a very strong push and your, your foot’s on the gas pedal for, for a couple years, you’re gonna have to have a breather in the market. It’s just not sustainable to keep going. Even double digit numbers for too long. But, you know, we saw some pretty aggressive single digit numbers for a while.
Rental demand will stay strong. Many, many potential home buyers will remain renters due to affordability issues. This benefits buy and hold investors like you and I, especially markets with limited rental supply. So that’s something to keep in mind. Look for those types of markets. You know, you can talk to our, our investment counselors here about those types of markets. You know, we’re kind of peppered around the country in different markets that are high rental demand, low supply type markets. Some of them are in the Midwest, some of them are peppered in the northeast, many of them are sprinkled around the south. Southeast multifamily properties will be in high demand too. And now when I’m saying multifamily, I’m talking about two to four units specifically in the rental space, like the residential space. They’ll stay in high demand, particularly in urban areas where home ownership is outta reach.
For many people, a comment about fix and flips, you know, fix and flips will face more challenges because there’s tight inventory and that makes it harder to find discounted properties. So people who want to be flippers are gonna struggle. People trying to get into that space are probably gonna give up. And those who are already in that space, and these are property providers we work with, many of them, you know, that constantly tell us that it’s just much more difficult to find distressed property for sale or, or properties that can be newly renovated that make a great rental property. Holding costs remain higher due to higher mortgage rates. And successful flippers will need to focus on high value renovations and shorten their hold times to maximize returns. So if you are in the fix and flip space or you’re looking to get in there, you have to be very conscious and considered these higher prices, higher hold times and higher cost of capital in order to acquire, hold and renovate these properties.
But you know, they will sell pretty quick. If you’ve priced it right and you’ve got a good renovated property, it’ll sell quick. So now, regional markets, let’s talk about that for a minute. Regional market trends will certainly vary, you know, so where should you as an investor focus this year in 2025? Let’s just quickly break it down. The Sunbelt markets like Texas, Florida, Arizona, Nevada, they’re still seeing strong population growth that hasn’t changed, but the affordability ho home affordability is becoming a growing issue. And this is why these markets are slowing down and appreciation rate are slowing down as well, is because fewer people can afford to get into these homes. So even though the demand is there, purchase demand, buyer demand, it’s waning. And that’s just slowing down the rental market. Well, both the, the sales market and the rental market, but the rental market, the rental demand remains very high.
But home price growth is definitely gonna slow down in some of these areas. And this is good for long-term buy and hold investors that are targeting rental properties. This is just kind of leading into a healthy and more balanced market. So that’s the Sunbelt, the Midwest and Rust Belt states like Ohio, Michigan, Indiana, Pennsylvania, these lower cost markets offer strong cash flow opportunities. It’s one of the reasons why we like these markets and have been in markets like Indiana and Ohio for many, many years. Demand from remote workers and investors, you know, priced out of coastal cities, are certainly being drawn to these places because the affordability is so much better and affordable. Multifamily properties are available, it much more abundant. And it’s great for investors who are seeking steady rental income from duplexes, triplexes four plexus. So if you’re looking for multi-family properties, although they are hard to find, they are more abundant in these Midwest and rust belt states.
And then of course you’ve got secondary and tertiary markets. Investors are moving beyond major metros to smaller cities with strong job growth. And you know, this is something we’ve been involved in for many, many years. You know, we’ve pretty much focused on secondary markets from the very beginning since we, you know, launched in early specifically January, but early 2024, you know, this is this is where we started is in the secondary markets. And then ultimately when prices got more expensive, we looked at tertiary markets. But, you know, investors have to move beyond the major metros to these smaller cities, not just suburbs, but secondary markets and even tertiary markets, which are just kind of extensions to many of these major markets. So look at cities with revitalization efforts and population growth. ’cause Those are definitely gonna be winners. And here’s just a couple of examples.
We’ve been in Huntsville, Alabama for many years, many years. We’ve been in different Tennessee markets for many, many, many years. And even like places in Iowa like Des Moines, although we’re not there right now, we’ve, you know, we’ve, we’ve got peppering of markets here and there, but these are great examples of secondary and tertiary markets that are doing very well and we’ll continue to do very well. So let’s kind of wrap up with some strategies for real estate investors here in 2025. It’s always a good idea to focus on cash flow over appreciation. Now I love appreciation. We all do. We want it, we’ll get it. And you can strategically choose your market so you get better appreciation or better cash flow or a hybrid market where you get both. But one will always lead the other. And that’s just the ebb and flow of real estate.
Often cash flow markets tend to drift to become appreciation markets. When there’s strong growth, sometimes appreciation markets become stronger markets and they weaken. As far as the cash flow market, it really just depends on where you are and what you’re looking at. But you know, with home prices, stabilizing, appreciation based investing won’t be as lucrative. So investors like you and I, you may want to try prioritizing today or this year on more higher yield rental areas that generate more steady monthly income. And markets with strong rental demand, like parts of the Midwest where we’ve been for nearly 20 years, will certainly be attractive and become more attractive. Kansas City, Missouri is a great example of that. Indianapolis, Indiana is a great example of that. Maybe consider midterm rentals in addition to your long-term rentals. You know, traditional long-term rentals is what we’ve offered for over 20 years.
You know, they offer stability, especially in high demand markets. It’s your tried and true proven bread and butter type of rental property. It’s, it’s, it is the rental investment. But you know, if you want to branch out and expand your portfolio, you could look at doing midterm rentals. This is not something we specialize in just FYI, but things that are like 30 to 90 day stays, they’re growing in popularity, particularly for corporate travelers. People who are referred to as digital nomads and healthcare workers. It’s kind of a more specialized market. You have to do your research on that to see if it’s something that makes sense for you. But you’ll never go wrong with the traditional long-term rentals because of the stability and the high demand for those, especially in high demand markets. That’s basically mitigating your risk as much as you possibly can for fix and flippers.
You know, with the tight inventory competition for distressed properties, we’ll continue to remain high. You know, this is not something I’ve really been a fan of, but you know, if it’s your cup of tea, go for it. But you know, just investors should be focused on properties that need cosmetic improvements rather than full gut rehabs today to maximize profits. Otherwise, you could get stuck because of the cost of money and the time of holding that property, doing more extensive renovations. And then, you know, last but not least, you know, as I mentioned, one of my 10 rules of successful real estate investing, it’s on the website. You can go and look at it, it’s a sticky post at the top of the blog. It’s always there. Diversify your portfolio. You know, you may want to consider diversifying into, you know, two to four unit multifamily properties, but geographic diversification is also important.
You know, build a portfolio in one market, have a a footprint, maybe three to five properties there, and then expand to another state in a different market that has different dynamics and build it that way. Some people may want to diversify into other things like you know, real estate syndications where it’s pretty much hands off because you’re only a limited partner, you’re not involved in anything day to day, you’re just essentially like a a shareholder if you will. You hold paper in a syndication, a group investment. I’m not, you know, I’m not suggesting or recommending, I’m just saying, you know, that’s part of diversification. But there’s a lot to be said about direct ownership being, you know, a direct investor owning the property, having full control and ownership of it, and then either self-managing or letting a professional full service property management company manage it for you, which is what we normally recommend most of the time.
Anyway, with that, you know, 2025 will be a year of some adaptation for real estate investors. Mortgage rates and inventory are gonna remain a bit of a challenge, but rental demand is very strong and opportunities exist and always exist for those who know where to look. You know, something that we talk about all the time and we help investors with all the time. So if you know, if there are any key takeaways here, just realize that mortgage rates may decline slightly this year, but they should stay above 6%. So plan your financing accordingly. Rental demand will remain strong. Try to focus on cash flow over appreciation when you can. But don’t, don’t ignore appreciation. Look beyond the Sunbelt. Sunbelt’s very popular, but the Midwest and secondary markets definitely offer solid opportunities. There may be opportunities for creative financing. This is where you really have to start looking for those needles in the haystack.
Short-Term rentals may be an opportunity, but you know, you do need to be mindful of new regulations that come in, especially at the city and state, or excuse me, city and the county level could be at the state level actually now they think about it. But you know, there’s always kind of like that potential risk in a market that is not well matured for short-term rentals. And that is pretty much it. So hopefully this was a relatively quick rundown for the 2025 housing market. And you know, what I see on the horizon, call them predictions if you want, but you know, I appreciate you listening. If you haven’t subscribed to the show, please do so. It only takes you a few seconds to click the subscribe button. Thank you for your ratings and reviews. Greatly appreciate it. If you need to get in touch with my team, just reach us at noradarealestate.com and we’re here to help you. So thank you for listening. We’ll see you all on our next episode.
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