Hello, and welcome to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli. Thank you for joining me today. Today I want to talk about something that I plan to or intend to do on a regular basis, and that is a housing market spotlight, but it’s not a spotlight, it’s really just kind of the state of the union. It’s what is going on in housing. In other words, let’s look at housing, the economy, housing trends, and let me present that to you in a way that helps you understand what is going on and maybe where we’re headed. You see, I spend literally thousands of dollars each and every month on data research analysis, and I take all that and I consume as much of it as I can, although that’s actually pretty difficult given my schedule. I’m extremely busy. I’m running and managing and overseeing multiple businesses.
I travel a lot, and given whatever time I have, which is not much, I try to consume as much of this research and information as I can. My goal is to distill that down into nuggets of usable information that you can take to get an overview of what’s going on, call it the 40,000 view of housing and the economy, high level stuff, but not stuff that you know is too data intensive or geeking out on the information so that way it’s digestible and understandable by you. So my goal is to basically consume, consolidate, condense, and present or deliver this information to you on either a monthly or a bimonthly, bimonthly meaning every other month basis. So we’ll see how it goes. And as far as the format for this, I’m not exactly sure how I wanna present it. I’m gonna experiment from episode to episode.
It will change, it will morph. I’ll find a format and style that I like in order to present to you, and if you have any input or feedback, then let me know. Tell me if you like it, tell me if there’s something you want me to change or something you want me to not discuss or something to add, but just feel free to provide me some feedback. But my goal is to basically provide you some useful information on a regular basis that I think you can take, whether you’re a real estate investor or not. If you’re a real estate investor, great. Doesn’t matter whether you’re seasoned and successful or a newbie and just getting started.
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So with that, let me begin by kind of setting the stage or the backdrop, if you will. So, Jon Gray, who’s the president of Blackstone, the largest hedge fund in the world, this is a multi, multi-billion dollar company.
In fact, if I’m not mistaken, I should almost use the word trillions, but they have an unbelievable amount of assets under management. So Jon Gray, who’s supposedly worth about 7 billion, and that’s according to Bloomberg, started Invitation Homes back in 2012. Invitation Homes, I believe is the largest landlord in the country. They’ve literally purchased tens of thousands of properties. Now think about that. Imagine how how much capital went in to invitation homes in order to acquire tens of thousands of properties over the years. So they are the largest landlord and property owner in the country, and this was all driven by Jon Gray. So he obviously knows a thing or two about what’s going on, and he’s putting his money where his mouth is. And given what he knows, he’s obviously making some pretty big bets. But in 2022 in the Wall Street Journal, he said, and I quote, never in his 30 year career had he seen real estate fundamentals stronger than now.
So that’s a pretty strong statement. And if you think about it, if someone of this caliber and doing what they’re doing is putting that much money behind acquiring tens of thousands of homes, and he’s saying that the real estate fundamentals are that strong and he’s talking about last year, then it’s certainly an asset class worth taking a close look at. And we’re talking about real estate here and more specifically residential real estate. And even more specifically, we’re talking about investment residential real estate. So on that note, with that backdrop, let’s kind of talk about a couple of different things. This is not in any particular order, but it will all weave together when I’m done. And I, I’ll try and go for about 20 minutes or so here. So let’s begin with kind of a high level conversation about the national supply and demand trends.
Trends are important and it’s important for you to keep an eye on trends because it’s far more useful in my opinion, than having a single data point, whether that be today or a data point referencing this month or a data point referencing the last year. If you look at trends, you can see where things are headed and you can make more intelligent decisions. This is why I love charts and graphs, is they tell me more than a single data point. So when we think about, or talk about or look at demand, here are some things to consider. First and foremost, depending on which study or research paper you look at, over the last few years, we’ve seen various experts and research documents tell us that we need somewhere between 1.5 million household units per year to as much as almost 1.7 million household units per year. These are new household formations that we need in this country to keep up with the natural and organic growth.
The, the demand for new housing. Fannie Mae peg this at 1.62 million households per year. So think about it, we need about 1.6 million new units, new houses, new doors, call it what you want, but new homes each and every year. Have we been keeping up with that? Not really. The last time we supplied that many homes, new homes or what we referred to as household formations was in 2007. And if you remember, that was the year before the great recession. Actually, that was the year of the housing crash itself. 2006 is when things petered out. 2007 is when all the builders had more or less just been piling up a bunch of inventory in the market across the country. And so, you know, we do need a lot of housing now. We have been catching up, we’re now producing more than the average annual requirement of about 1.5 million housing units.
So if you look at it from that perspective, we’ve kind of caught up, we stand the chance of oversupplying several markets in the coming years, but it has been expressed or predicted that we won’t actually reach a point of catching up until the year 2030. So again, if you think about that, we still have another six years of overall net deficit in household formations. Now, when you also look at demand from who are these people, like who’s coming online, where are these people come from? Well, obviously, you know, there’s the element of immigration into the country, but you know, that’s a relatively speaking small number. A bulk of this is coming from generation Y and Gen Z. So Gen Y, the millennials are now moving into the rental market. These are people aged between 27 and 42, born in the years of 1981 through 1996, and they represent about 72 million people.
Think about that. That’s a huge number. In a country of 350 million people, 72 million people coming online and online, meaning that they’re coming of age, they are getting into the rental market and some of them are starting to form families. And now they’re gonna need to move into a home or a house or some sort of property for themselves, or maybe move up because they already own property. Now they need a bigger property because they’re starting a family. So it’s 72 million people that are putting upward pressure, the demand on the housing market. At the same time we have Gen Z and these are also millions of people, 69 million people to be a little more precise that are about to get out and rent. And some of them are, you know, are gonna buy if they’re in their, you know, mid twenties. But Gen Z are essentially people born between 1997 to 2012, their ages 11 to 26.
And so these 69 million people are still young and not ready to necessarily move out into, you know, the housing market, but they’re, they’re gonna start looking for rentals sooner or later. And you know, they’re getting of that age. So this is a lot of demand for housing. So demand is definitely strong. We’ve got Gen Y, gen Z, we are not building enough housing units per year on average, at least we haven’t been for decades. And so there’s just been this ongoing deficit. So the demand side of the equation is pretty strong. Now, when we look at the supply side, there’s just not enough. This is why builders are scrambling all over the country to build as fast as they can, as much as they can to feed that demand. When you look at the resale market, resale inventory has been pretty low. In fact, up until recently, it was actually less than one month’s worth of supply.
Things have softened a little bit here over the last month or two because of rising mortgage rates and other factors. But you know, now we’re in the spring buying season and there are more people coming on board putting their houses or their properties for sale. So you see that on the mls. But all in all, we’re still close to about one month’s supply, certainly not more than two, but we’re around one or slightly over one month’s worth of supply, which is very, very low in the grand scheme of things because we actually need in general between four to five months’ worth of supply in a normal balanced housing market. Now this is very much market specific. Some markets have more, and some have less supply as far as their equilibrium point, but it’s usually never less than two to three months’ worth of supply. Call it three to four being very conservative as a point of balance.
But we’re nowhere near that. We are very much undersupplied. So what does that do? It leads to increased occupancy, it leads to increased rental rates and it leads to higher property values. This is because it’s all upward pressure on the housing market because demand is strong and supply is tight. So clearly we have this imbalance and it’s been this way for quite a while and that’s why we’ve seen some pretty strong rates of appreciation over the last, I’m gonna call it decade, but it really started to turn around or swing around in 20 12, 20 13. And so here we are about 10 years later and we all know what the housing market has been doing or very much market specific, but that’s kind of a look at the national supply and demand trends. That is great news for you if you’re a real estate investor or want to be a real estate investor because it means you’ve got tailwinds.
We don’t have a lot of headwinds. In fact, there’s very few headwinds right now as a real estate investor or just being in the real estate market. More specifically the residential real estate market. Commercial is another story. It’s got headwinds, it’s got some issues. There’s potentially, you know, a good number of foreclosures coming in the commercial space in the months and years to come. But you know, commercial is a different animal. So we’re talking about residential here. All right, so real quick, just a comment about shadow demand. Shadow demand is essentially what I refer to as young adults, those between the ages of 18 and 29 years old. And these are young adults still living with their parents. Now, certainly this ties into what I was talking about before when I was talking about generation Z, which are ages 11 to 26. The shadow demand are, are young adults ages 18 to 29.
So there’s a lot of overlap. But there were, you know, there was a study done not too long ago where they looked at how many young adults are still living at home with their parents. And they went as far back as the 19 hundreds. And the last time we peaked was right after World War II with 48% of young adults living at home. It was essentially in the mid-1940s. So that was 48%. Now, if you look at it today, we’re at 52%. So right around 52%, that’s how many young adults are still living with a parent or both parents. So that is part of that whole demand equation. You know, I refer to it as shadow demand, but these are people living at home, they’re gonna need to get out. And we are at an all-time high going back to the early 19 hundreds.
Now, as far as the economy goes, the economy is still pretty darn strong. If you look at employment growth across the country, most markets, major markets are averaging about 4%. 4% is the weighted average of employment growth year over year. And this data is as of January, it hasn’t really changed all that much, but it is starting to soften a little bit. But anytime you are over two and a half percent, it’s considered strong growth, positive growth. That means that the economy is strong. Ideally, you do wanna see employment growth average about two and a half percent. But when you look at a lot of these markets, they’re averaging 3, 4, 5, even 6%. Dallas, Jacksonville, Houston, 6% employment growth year over year from January to January Mark, it’s like Portland, Miami, Tampa, San Francisco, Raleigh, Durham, Seattle, and Charlotte, North Carolina. And in even San Bernardino County, Riverside averaging 5% employment growth.
Very strong, very healthy markets. At 4% include Nashville, Atlanta, Orange County, California, where I’m based in San Antonio, Austin, Las Vegas, New York, San Jose, Boston, Orlando, and Denver and Minneapolis. At 3% are markets like San Diego, Phoenix, Los Angeles, Sacramento, Philadelphia, and Chicago, as well as the East Bay area. So these are markets that are above the two and a half percent, I don’t wanna call it an average, but the point where we essentially mark a local market or a local economy as being strong. So the economy is strong, employment growth is strong across the country. We definitely do not have an employment based recession, which is what the Fed is trying to create. They do wanna see unemployment increase, they wanna see unemployment filings go up and they want that market to soften because then they know that consumer demand is going to come down, it’s gonna soften and that will help put the brakes or pump the brakes on inflation.
And that’s their end goal. That is their bullseye target that they’re going after. So until that happens, which I suspect it will happen probably later this year, you know, we’re gonna still see inflation above its historic norm and the Fed is still gonna be pish on keeping, you know, interest rates up and working towards lowering inflation overall. Now, when we look at resale listings, basically the, you know, properties in the resale market that go up on the MLS, this is not new construction. What we find interesting is that listings have increased tremendously. Some markets, you know, a whole heck of a lot, but more or less across the country in the top metro areas, especially the top 33 metro areas, we’ve seen a change in resale listings year over year. Go from as little as 5% increase in New York to as much as 509% in Austin, Texas.
Yeah, that’s not a mistake. I that I did say 509%. Now, even though that’s a huge increase, Austin’s a bit of an anomaly. It is actually 24% above it’s high in 2009. But when you look at all the other markets, they’ve increased double digit into the triple digit year over year listing increase. Now that sounds bad in a way, but really if you look at a market like Raleigh Durham that went up 260% Tampa, 252%, like these are whopping gains, when you look at those markets, they’re still between 30 and 36% below their 2019 high or level of M ls listings. So we’re still below what they were in 2019, even though there was a huge jump over the last 12 months. So on the one hand, this is a good sign, we’re seeing more inventory come online, but at the same time, the people who are selling these properties, this resale market, they still need a place to go because if they’re selling their home or a house, they’re displacing either themselves or whoever’s living in that property to go to another property somewhere else, whether in the same market or in another city or another state.
So that overall demand doesn’t decrease. It’s just that people are finally are starting to put properties on the market, which is good for local people who are looking to buy property. And it fulfills that local demand, but the demand doesn’t go away, it’s just being shifted.
Now, just a real quick overview on housing conditions across the country. I know this is what most real estate investors, if not all real estate investors are certainly interested in. So when we look at the top 50 markets and rate them from very slow to very strong, this is essentially how it breaks down. And I’m just gonna give you an overview here so you get kind of the, the pulse in the country. So this has changed considerably from one year ago. One year ago. Most markets around the country were rated as strong or very strong in terms of price growth. And when I say price growth, I’m talking about appreciation as well as rent prices, rent growth. And so looking at it today, things have cooled down quite a bit across the country in pretty much most every market today we don’t rank any market as being very strong anymore.
There are about 18% of the markets that we’re tracking as strong. 37% of those markets are what we would call normal. Looking at its historical norms, that market is back to normal conditions in terms of price growth and rent, price growth. But a lot of those markets, 42% of them have now shifted into a cooling period where they’re growing at a slow pace. Now it doesn’t mean a negative pace, meaning it depreciating, it has slowed down considerably and a very small percentage, about 3% are what we would rank very slow. Three of those markets in particular include San Francisco, no surprise there. San Antonio, Texas, A little bit of a surprise, the surprise to me was actually Cleveland. Cuz Cleveland has been essentially a very consistent perennial market and it still is for cash flow and cap rates. But in terms of price growth, Cleveland has really become one of those slow markets.
Well actually I’ll call it very slow. The slow markets include most of the markets around the California Bay area, Boise, Idaho, that had a tremendous run, salt Lake City that had a tremendous run. Las Vegas and Phoenix, Arizona. Again, markets that have had a tremendous run, lots of appreciation over a prolonged period of time. Now those markets are starting to take a breather. Seattle, Washington, Tacoma, even Reno, Stockton, Bakersfield, other markets include Minneapolis and Chicago, Fort Worth, Texas, certainly Austin, Houston, Philadelphia, Baltimore, and Washington, dc. Now again, these are markets that we label as slow. That’s not necessarily a bad thing unless those markets are overpriced relative to their rents. Meaning as you heard me say in many, many, many episodes in the past, the rent to price or rent of value ratio is out of whack. There’s just too much of a discrepancy in those properties.
Won’t cash flow, let alone give you a favorable cap rate on those properties. But when you look at markets that are normal or strong, for the most part they are on the eastern half of the US over in the Midwest flyover country, areas in the Northeast and certainly the Southeast and Florida. So Florida, North Carolina, Charlotte, well, North Carolina, South Carolina, Georgia, Tennessee, Alabama. These are areas that are doing quite well. Maybe not all of those areas having strong appreciation or that appreciation potential. There’s still momentum there, but there’s still a lot of migration. So there’s strong demand and long term these markets are gonna do very, very well. So this is why we at Nora real estate investments have been focused on the eastern half of the US and the Midwest and areas within the Northeast and a lot of areas in the southeast, all the way down through Florida.
It’s just because that’s where the growth is. So kind of wrapping up here, there’s a lot of positive momentum and the momentum is building. There is a lack of resale supply due to few sellers that’s increasing. But there are far few sellers and that just drives demand to the new home market. New home demand has picked up considerably over the years. A little bit of a breather right now, but demand is still strong and builders are still selling property, ma not building as much, but they’re still selling property and they’ve adjusted by providing incentives to buy down mortgage rates to make their homes more affordable for people who are coming in. So that has certainly helped. New home inventory is rising, but it’s not above normal levels in most markets to date. And about a third of builders are actually testing net price increases and they’re actually getting it.
People are still buying even though they’re increasing their, their prices in an environment where mortgage rates are rising. So it’s very interesting. There’s, there’s still a lot of positive momentum and, and that just means that I’m still very bullish on housing in general, the housing market in general. But you know, for the rest of the year I still see strong 2023, we’re gonna have low resale and new home supply, which means high occupancy. But overall I’m still bullish cuz we are undersupplied, there’s still strong demand. Mortgage rates will, you know, continue to normalize. Eventually they will start to come down. We might see another bump up in mortgage rates here this year during the summer, maybe early fall. But ultimately the Fed will have to, you know, take their foot off the brakes and allow the economy to continue doing what it’s doing, which is to run an engine.
I don’t think they’re crazy and hell bent on crashing the economy. So, but inflation will continue, it’s gonna continue to push costs higher. And as you all know, real estate is one of the best or greatest inflation hedges, especially when you could lock the purchase in with a fixed rate mortgage. And in just in wrapping up, you know, kind of things I call rules for success. Look, at the end of the day when you can’t count on banks, especially when many banks are failing, and I expect more banks to fail, especially the smaller banks, the boomer boutique banks. But when you can’t count on banks or the stock market or precious metals or anything like that, invest in a hard asset like real estate. Real estate is the best hard asset. It’s income producing. It’s an inflation hedge. It’s historically proven and it’s available to virtually everybody.
And then, you know, another rule for success is to be market agnostic again, you know, I get asked often is, you know, is this a good time to invest in real estate? Should I wait or, or should I get into the market? And I always say it’s not about when to invest, it’s about where to invest. There are always opportunities out there throughout the country amongst the hundreds of major markets that we have, minor markets and submarkets. There’s always opportunity to invest in real estate. Just do your homework, have the right team around you. If that involves us helping you, great. Let us help you. And that’s, I mean, that’s exactly what we do. That’s what we’ve done for 20 years. But remember, it’s about where to invest, be market agnostic. And that’s about it. I will talk a little bit more about my predictions and forecast for the rest of the year in the episodes coming up.
So for now, I’m gonna wrap it up at this point. I think overall you know, we’re in a great situation as a real estate investor. And so if you’re a real estate investor and a landlord, you know, pat yourself on the back. Continue investing as I like to say on my coffee mugs. Keep calm and invest on. Well, that is it for today. I appreciate you listening. Remember to subscribe, just click the button, takes you three seconds, share this show with your friends and family. I greatly appreciate it. Also, if you have a rating and review, you’d like to contribute. I read all the reviews, but do that on iTunes. You could do that on Google as well. But iTunes is the 800 pound gorilla. And that is it for today. Thank you for listening. I will see you all on our next episode.
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