With inflation soaring, interest rates rising, and growing concern over a recession taking shape, it's no surprise to hear the real estate market is changing. Thanks to shifts in consumer preferences, changes in supply and demand, and the emergence of new real estate investment opportunities, the end of 2022 and the coming years could look a lot different than the years prior.
We asked three Motley Fool contributors what they feel is next for the real estate industry, including the biggest opportunities and hurdles for investors to prepare for in the remainder of 2022 and 2023. Here's what they said.
Residential real estate
Liz Brumer-Smith: After two years of unparalleled rental and home price growth, it's becoming abundantly clear that the era of the red-hot seller's market is coming to an end. Active listings increased 19% in June 2022 and existing home sales have consistently decreased for 10 straight months. One in five home sellers lowered their price in May 2022, marking the biggest jump in home price reductions since the start of the pandemic.
The cooldown is undoubtedly thanks to rising interest rates. Rising mortgage rates, which are sitting at just over 5.7% for a 30-year fixed mortgage at the time of this writing, have made the already richly valued homes in many markets unattainable for a growing number of Americans. A recent report from ATTOM Data Solutions found that home affordability declined by 97% in the 575 counties it tracks.
Lower buying activity and more homes hitting the market are helping reduce competition, but it doesn't necessarily mean pricing will cool. Home prices are still growing, with June 2022 marking a new record of $450,000 for the median list price, a nearly 17% increase from the month prior. Lower housing affordability will also mean that rental housing will continue to play an increasingly important role in the housing market, with rental rates likely maintaining their steady growth.
For the remainder of 2022 and likely into early 2023 it's unlikely home prices will revert, but rather grow at a slower rate. Some sellers may reduce their prices in less competitive or supply strapped markets, but there is still a notable shortage of housing supply that will continue to put pressure on prices.
Investors should use caution if they are relying on home price appreciation as part of their investment strategy and instead look for investments that prioritize cash flow through rental income. Residential real estate investment trusts (REITs) like Invitation Homes (INVH 2.01%), Mid-America Apartment Communities (MAA 1.86%), and Equity Residential (EQR 2.99%) are still seeing incredible rental growth and demand with occupancy levels nearing all-time highs. And given the stock market volatility as of late, all three of the companies are on sale right now, making it an extra advantageous time to invest in rental properties.
Mike Price: The long-term case for investing in farmland is clear: The amount of arable land worldwide is falling and the number of humans needing to eat is rising. This creates a reduction in supply and an increase in demand. The short-term case is fuzzier.
Most likely, farmland will continue to do well over the next six months as long as inflation stays high. When food prices go up, owners of farmland make more money and require more to sell the land. According to the Bureau of Labor Statistics, the May food at home price index rose 11.9% over the preceding 12 months; that's the most it has risen over any 12-month period since 1979.
The Fed is working on it -- there have been several rate hikes already this year -- but so far, there's no end in sight for inflation. According to the NCREIF, total farmland returns were around 7.8% in 2021, with half coming from price appreciation and half coming from income. Debt isn't flowing as easily to buyers now as it was in 2021, but you can expect at least that level of return from farmland for the full year of 2022, because income will increase along with the food price inflation.
What does it mean for individual investors? The most common way for individuals to invest in farmland is with the two big farmland REITs: Gladstone Land (LAND 2.51%) and Farmland Partners (FPI 1.86%). Both had spectacular returns in 2021, as rumors of the coming inflation started to materialize into facts. But both have fallen like most REITs so far in 2022. Gladstone is down around 35% year to date, and Farmland Partners is down 20 %.
The two REITs have different strategies. Gladstone focuses on healthy crops with grains as a secondary focus. Farmland Partners is more vertically integrated. In addition to owning and leasing farmland, it brokers farmland sales, runs auctions, and farms some of its own land and land that it leases from others.
Both REITs should have good FFO growth in 2022, with Farmland Partners moving from losing money to making it, and both REITs recently announced increased dividends. I lean toward thinking that the market soured on the two REITs so far this year because it was down on REITs in general. If they have good Q2s, they'll likely do well over the rest of the year.
Metaverse real estate
Kristi Waterworth: Metaverse real estate has done well compared to other crypto-based assets, partially, I believe, due to the utility inherent to it. Unlike art NFTs, for example, virtual real estate gives owners the ability to generate passive income no matter what the crypto market is doing. For example, in a recent interview with Fast Company, Sam Huber of London-based metaverse real estate company Admix explained that his company's business model can generate monthly rents upwards of $60,000, with some projects having profits of 70%.
Of course, that was in May. What does the future of metaverse real estate hold now?
Because it's such a new asset, it's always hard to know for sure what we're looking at. But based on what I'm seeing, it seems like the future is bright. There are three main metaverse platforms on my radar right now for long-term adoption and development: Decentraland (MANA -2.54%), The Sandbox (SAND -1.33%), and The Bored Ape Yacht Club's (APE -4.05%) Otherside.
Each of these platforms is at a different stage of maturity, with Decentraland being the most developed and the only platform that is fully live. The Sandbox is open for visitors in fits and spurts, as the world continues to be created. Otherside just opened land sales in early May, so it may be some time still before it's available for visitors to check out.
Land sales across all platforms have dropped in volume, as the crypto currencies that power them have slipped from all-time highs. However, interest isn't dropping. In fact, if anything, flippers are moving out of the systems and metaverse landowners who plan to hold their purchases and invest in the communities they bought in are digging in deeper. There have consistently been more buyers than sellers during this dip, and I believe that will ultimately generate strong long-term growth for virtual landlords.
The rest of 2022 and into 2023 are full of promise. As uncertainty about the global economy and the state of the world calm a little, and large brands continue to lead the way to building really cool experiences within metaverse spaces, the hype that we saw in November 2021 could start to bear fruit.