2023’s Winners and Losers in the Real Estate Market
As 2023 comes to an end, it’s time to reflect on the year’s real estate market trends and identify the winners and losers.
Single-Family Homes: A Winner
Single-family homes have emerged as winners in the market since the pandemic. People prefer to live in lower-density environments, avoiding close proximity to others. Luxury homes experienced slow sales and price drops, but homes under $2.5 million held their value.
An unforeseen benefit was that as mortgage interest rates increased throughout the year, currently hitting the 8% range, buyers who could have purchased in the $3-4 million range had to lower their price point to qualify for a loan. They purchased less expensive homes instead in areas like the Richmond and Sunset districts, benefiting the market there.
Condo Market: A Loser
The condo market suffered, especially luxury condos and residences in downtown, financial district, and SOMA areas. This trend continues from the pandemic as people prefer to live in low-density areas and don’t need to live close to work with remote work still prevalent. This negatively impacted the condo market.
2-4 Units Market: Suffering
Higher interest rates also hurt the 2-4 units market. In the past, many of these properties were sold to owner-occupied purchasers who used rental income to offset their mortgages. However, with an 8% interest rate and a $1 million mortgage, the monthly payment is over $7,000. Richmond and Sunset duplexes are unable to rent out enough to cover their own mortgages, and buyers for smaller properties are scarce. Prices may have to decrease substantially to attract buyers back to this segment.
5+ Units Residential Market: Struggling
The 5+ units residential market is also feeling the pressure of high interest rates. Typical cap rates in the past hovered between 4-4.5%. However, with bank CDs currently at about 5%, investors are demanding higher returns for their investments, putting significant pricing pressure on the apartment market.
Commercial Buildings: The Biggest Loser
Commercial buildings have been hit the hardest, with several properties going back to the banks due to increased vacancies. Without rent payments and uncertainty about when the situation will improve, commercial buildings have been substantially devalued. Some properties have sold at 25-50% off their peak values from a few years ago.
Tenants: Winners
Tenants are benefiting from this market as rents have gone down since the pandemic and appear to have stabilized. With interest rates increasing, some tenants continue to rent. Commercial tenants can choose from a wider variety of spaces and at much lower rents than before.
Lenders: Big Losers
Lenders are struggling as refinances and real estate sales are down. Some have laid off loan agents, and banks holding onto mortgages in their portfolios are realizing losses on the money they loaned out previously. Foreclosures are starting to tick up, which will hurt their bottom line even more.
Buyers: Mixed Results
Buyers who purchased in the last few years have seen their property values drop but were able to lock in lower interest rates. They might not qualify for a loan in today’s market and might have a higher monthly payment even if they could afford it. Some buyers benefited, while others did not.
As evident, different investments perform differently within real estate. It has always been this way. The bottom may be near, if not already reached. Buyers and sellers should consult a CPA, tax attorney, and Realtor for insights before moving forward.
For expert advice on real estate in Richmond and Sunset Districts, contact John M. Lee at 415-465-0505 or email john.lee@compass.com.
Orginal article: Link To Article – provided by Kansas City Realtors
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