In this episode, I interview Ben Miller, the CEO of Fundrise, discussing his revised perspective on the real estate market for 2024 and beyond. I'll then share my follow up interview with Ben for his outlook on 2025. Financial Samurai is an investor in Fundrise and Fundrise is a long-time sponsor of Financial Samurai.
The year 2023 posed challenges for institutional real estate investors, marked by 11 rate hikes and a significant surge in mortgage rates since the first quarter of 2022. As a result, institutional real estate prices declined.
Ben believes October 2023 represented the low point for the real estate market after experiencing 18 months of continuous decline. His current optimism stems from an expected decrease in interest rates.
The following chart provides a concise summary of his viewpoint and outlook.
In this real estate market episode, we explore several key topics:
- The reasoning behind Ben's belief that October 2023 marked the bottom, and the less obvious indicators supporting this perspective.
- Understanding the motivation behind why some are selling near the bottom
- The possibility of using one fund's cash to support a deal in which another fund is investing.
- Ben's insights on investing in office properties at significant discounts.
- Drawing parallels between e-commerce and the work-from-home trend, highlighting the potential permanent increase in the value of residential properties.
- Emphasizing the importance of investing in alignment with macroeconomic tailwinds, not headwinds.
- Discussing the potential percentage upside in institutional real estate prices for 2024 and 2025.
- Exploring the methodology for calculating the Net Asset Value (NAV) of specific properties within the fund.
- Recognizing the non-linear nature of significant changes and the importance of staying invested to benefit from high catalyst moments.
- Reflecting on Ray Dalio's perspective – “I'd rather be approximately right than precisely wrong” – especially in the context of predicting year-end interest rates.
- Considering the viewpoint that a recession might be bullish for real estate due to the potential rapid and extensive decline in interest rates.
You can listen to the episode on Apple or Spotify. Or you can click the embedded player below. If you listen to my previous episode with him, he was decidedly more bearish.
Latest Conversation Now That The Fed Is Finally Cutting Rates
Here is a follow up conversation with Ben Miller, CEO of Fundrise, now that the Fed is starting to cut rates. We are in the beginning of a multi-year interest rate cut cycle, which is bullish for real estate prices.
There were huge bidding wars in spring 2024. I expect there to be even bigger bidding wars in Spring 2025 as the average American finally begins to buy.
Here is my follow-up interview with Ben on why he is bullish on residential commercial real estate in 2025 and beyond. Fundrise performed well in 2024 and he expects his portfolio of assets to continue performing well in 2025 for four main reasons.
If you want to dollar-cost-average into a Fundrise fund, you can do so by clicking here. The investment minimum is $10. I've personally invested over $300,000 with Fundrise to take advantage of the long-term investment trend of a relocation to lower-cost areas of the country due to technology.
“We can say with strong conviction that the housing market in terms of home sales and demand has probably bottomed,” Mark Zandi, a top economist explained. “Everything indicates [the 30-year mortgage rate] will likely go to 6% rather than 8%, and if that’s the case, we should start to see improvement, but this is a process.”
Financial Samurai is an investor in Fundrise and Fundrise is a long-time sponsor of Financial Samurai.
Oops, the fed funds rate is still 5.33% as of July 6, 2024 and it has not dropped in 2024.
So no, the real estate market had not bottomed out in January 2024.
You cannot time the market.
True, it’s not easy to forecast the future. However, we talk about the bottom of the real estate market being in October 2023, not January 2024.
Despite mortgage rates and the Fed Funds rate staying stubbornly high, after the June jobs figure, the expectations are for one or two cuts by the end of the year. In addition, there has been some recovery in commercial real estate prices since the beginning of 2024.
In my opinion, the delayed rate card simply gives investors more time to scoop up properties at depressed prices. The spring of 2024 was incredibly robust for residential real estate in many parts of the country. If mortgage rates to go down in time for the spring 2025 season, I think prices are going to do even better.
Related: Understanding why people get into property bidding wars
Sam,
When making the decision to rent a property out vs. selling it, do you take deprecation recapture into account? The only way around paying the high recapture rate would be through 1031 exchanges, but then the assets would basically be stuck in the rental property bucket forever, unless you’re willing to pay a hefty recapture rate in addition to whatever the capital gains are.
I’ve been wrestling with that same decision. It seems like there’s an extraordinary high cost to be paid if one ever decided that they wanted to convert the rental property into a liquid asset through the sale of the property in the future.
I’ve been a dedicated real estate for over 10 years. My wealth is 50% in stocks and 50% in real estate. I almost never sell and I’ve done one 1031 exchange. You’re right in that your stuck with the investment in the real estate bucket if you want to avoid taxes, but I’ve done quite well with doing cash out refis over the years. It’s provided a lot of liquidity which I’ve typically reinvested.
On your 1031 Q, we have been down sizing many of our investment properties some of which we then hold the notes on & get 10-12% without them flinching. Unfortunately, facing significant depreciation recapture (DR) & LT Cap Gains (LTCG) we have had to seriously consider the 1031 strategy on several properties that have appreciated 200-400%. However, you can effectively escape the eventual DT & LTCG, either by passing the property on to the kids or, as explained in the attached article, by waiting the required 5 years. It’s an angle the more sophisticated RE investors have taken & I’m surprised it’s not yet been eliminated. There are also other alternatives explained to avoid the necessity of 1031 funds going into another ‘physical like kind properties’ & still avoid an immediate Taxable event.
https://www.1031exchange.com/faq/#:~:text=If%20a%20property%20has%20been,sale%20will%20be%20fully%20taxable.
I’ll admit that I haven’t yet listened to the podcast. But the “Brighter Days Ahead” phrase in the headline reminds me of the way that much of the financial media seems to celebrate when real estate prices or stock prices go up, and lament when real estate prices or stock prices go down.
I tend to have a contrarian view, in that I see a bright side to lower real estate prices and lower stock prices. For real estate, lower prices could mean that first-time home buyers can more easily afford a home, which is a positive thing. (I say *could* because interest rates matter too, and interest rates have not been helpful to home buyers lately.) For stocks, lower prices mean better buying opportunities for those who are still young enough to be buying more than selling. So I try to have a positive outlook on lower prices for real estate or stocks. (But maybe my perspective on stock prices will change once I retire!)
And even though I already own a home, lower prices are fine with me, because when I sell my current home, I will likely want to buy another one. So if my home will sell for less, then whatever house I buy next will probably sell for less as well. I would also like to see my teenage sons be able to afford a house in a decade or so, so that’s another incentive for me to root for lower real estate prices.
Good to be optimistic. Would love to hear your feedback after you listen.
Historical spread between the 10-year and 30-year mortgage can easily go back down to the historical average of 170 bps from 260+ currently. As a result, the 10-year bond yield doesn’t even need to decline for mortgage rates to head back down to 1%.
I’m definitely dollar-cost averaging into real estate now. Selling now is not a good idea. We could easily see a three-year upswing.
Thanks Sam! This is exciting. Can you help me reconcile something? I’ve often heard that real estate performance lags that of equities. With the understanding that when the Fed starts cutting / yield curve un-inverts is when the real pain starts for equities, can’t we expect that pain to eventually make its way over to real estate? Thank you!
These discussions with Ben Miller are very informative. I am an active investor in Fundrise and the Innovation Fund. I look forward to the follow up interview on the Innovation fund. Thank you for your work on these podcasts.
I just led a family member to get into contract in coastal San Diego this week using Samurai tips. I feel very relieved since I believe everything mentioned on this post/podcast. Demand is already strong to start the year and the inventory is where again, and interest rates are about to do what again? Thanks Sam for keeping us on our toes.
Congrats! And hope they got a relatively good deal. I do expect bidding wars to be more common this Spring.
Just make sure they own for at least five years! Don’t get real estate FOMO like me buying so often.
Fantastic interview as always and great insights. All of this makes sense to me. I see interest rates finally going down this year (it sure has taken the Fed long enough). And I believe there are many buyers who are eager to come out of hibernation, and sellers who have been holding back for 6mo to a year+ and are ready to come to market. I think this new year will be good for the real estate market.
The bottom of what? Housing is as affordable as it ever has been and is only getting worse. With rates and prices where they are, something’s gotta give.
That’s the beauty of investing. We’ll see where home prices will end up this time next year.
Worth reading: What If U.S. Home Prices Got As Expensive As Canadian Home Prices
As more Americans travel around the world, not just Canadian, they’ll realize how cheap U.S. real estate actually is compared to the rest of the world.
Hence, my biased opinion as an owner is that median home price will be up this year. If I’m wrong, I’ll suffer the consequences accordingly given there are no guarantees when investing in risk assets.
USA is not Europe or any other continent .has land for billion people or more.they build apartments building with 3or 4 floors very easy can go for 5 or six floors or more in suburban area.you see building offices of1 or 2 floors
Usa should be paradise.House prices should be cheap because there is planty of land.
Yes, the US has a ton of land, but what is currently available is not where most people want to live. Here in Charlotte, they are already building 20 miles into South Carolina to have affordable housing and rentals – that’s a good 75 minute drive into central Charlotte. If we build a ton of cheap apartments in North Dakota or the middle of no where in Texas, who is going to live there?
There is an incredible amount of wealth in Asia. What Americans perceive as expensive others see as cheap. As an example I met a Chinese lady on a domestic flight from LA to Denver in late 2011. She had paid cash for 10 properties in Las Vegas. We were both heading to Denver for opportunities thereat. Around the world property is down between 10 – 30%. It’s been great for rental cash flow but there is a huge well of wannabe buyers. As rates fall the renters will switch to buyers. Finally, most of Asia is far from a liberal democracy. The citizens of Asia long for a liberal democracy and all the opportunities that offers. That’s millions of realistic buyers.
Bingo. Any visit to Hong Kong, Singapore, Mumbai, Beijing, and Shanghai will show how cheap U.S. real estate is, even in the most expensive cities like San Francisco, NYC, SD, and LA.
In addition, withe how well the U.S. has outperformed, economy/stock market/real estate market, since 2020 COVID, there is even greater demand for U.S. assets.
Related post: Foreign Real Estate Investors Are Going To Buy Up U.S. Property