Dave Meyer:
Is the real estate market going to crash? Every day, there’s a new headline screaming that it will, but people have also been saying that since 2012, that home prices are about to free fall and it hasn’t actually happened yet. So this is all confusing. And if you’re a real estate investor, it’s pretty important to know what’s real and what’s fake news. So I got you. I studied the housing market and today’s episode, I’m going to give you my opinion about a potential crash. And I’m also going to explain to you the data and the math behind a crash, because believe it or not, there are a few key indicators that can tell us if a housing crash is imminent. They predicted the crisis in 2008, and I’ve gathered all that data and will share what they’re saying today. So if you want to make sure you’re not buying a new property right before the crash or just not sure what to believe, keep watching.
These are the few key numbers that can foreshadow exactly what’s about to happen.
Hey everyone, welcome to the BiggerPockets Podcast. I am Dave Meyer. In addition to being an investor for 16 years now, I’m also an analyst. That was actually my first job at BiggerPockets. I have a graduate degree in data analytics, and I’m going to be honest, I really like doing this stuff. Spreadsheets are actually fun for me. I am one of those rare people, believe it or not. And for the last 10 years or so, I’ve focused my energy as an analyst on the housing market. And a big part of this effort of understanding what’s happening in the market is to calibrate and understand risk. For anyone who lived through the great financial crisis, the fear of another genuine housing crash is always on the mind. So from both an analytical perspective and because I own real estate, I don’t want to lose my shirt and therefore I spend a lot of time thinking about a potential crash.
And today I’m going to share with you what I know. I’ll give you my honest opinion at the end, but I also just want to show you all why I think the things I do, what indicators and data we can look at to get clues about the future of housing prices and what is likely to happen next. This is Real Estate Crash Math. Let’s get into it. First up, let’s just talk about the mechanics of a crash because it sounds like this big mysterious thing, but we can actually understand in real math and real economic theory how a crash actually happens. We’re going to do a little explainer of Econ 101. Prices in a market like what we have in the United States are determined by supply and demand. People probably know this and most of the time when you’re in a “normal time” for the housing market or really any other market, things are usually in relative balance and markets are stable.
Prices go up a little bit in one direction or the other. Total quantity or the volumes of homes sold in any given month go up and down a little bit, but they’re usually pretty predictable. But crashes can happen. They do obviously happen and they do when either supply or demand or both get a little bit out of whack. And specifically when prices go down and we see a crash, it happens with either a big increase in supply. So for housing, that’s way more houses getting listed on the market and sitting on the market. We measure these things through new listings and inventory in the housing market, but that’s a big increase in supply. The other thing that could happen is big decreases in demand when far fewer people want to buy a home. You could also see both. You could see increasing supply at the same time as you see decreasing demand.
And when any of these combinations happen, either huge increases in supply, big decreases in demand or modest changes in both supply and demand, prices can fall and they can fall really quickly. That’s a crash. This is exactly what happened in 2008. So in our conversation today, we need to frame it through this lens because a lot of people talk about crashes and they’re like, “It’s just too expensive and that is a factor in whether or not a crash is going to happen.” But ultimately, if a crash is going to happen, we will need to see these mechanics actually play out in the market. Will we see increasing supply? Will there be less demand? Those are the questions we have to answer for ourselves. And luckily, we have data to look at all of this. First up, we’re going to look at the demand side, which is again the buyer side.
Basically how many people are looking to buy homes? And this is a popular refrain that I hear all the time on social media that there are no buyers, that affordability in the housing market is terrible, and therefore the market is going to crash. And again, if there truly were no buyers in the housing market, of course the housing market would crash, but that’s not actually what’s happening as we approach the end of 2026. There’s actually a lot more nuance. So let’s actually dig into the data and talk about what’s going on. First, I like to look at something called pending sales. This is a great measure of what’s happening in the market because it’s the actual number of people that go out, sign a contract and intend to buy a home. This is real transactions happening. And recently we’ve seen some interesting moves in what’s going on in pending sales.
For the first half of the year, pending sales were doing just fine, but in the last couple of months, August, September, October, we’ve actually seen a pretty significant decline in pending sales, which tells us that demand is starting to go down. Now it is not in free fall, but we did see some significant numbers. It did go down in September, 11% year over year and 7% month over month. That’s a significant change, especially when you consider just that home transaction volume, the number of people buying homes was already low. So seeing it lower is concerning. And the other part about it that’s just kind of frustrating and a little bit disappointing is that in the beginning half the year, demand was up. We were seeing pending sales go up and that was encouraging and we were starting to get into better territory for the housing market.
But after the war in Iran started and mortgage rates started to go up, we have seen a reversal. So that is one way to look at demand. And I just want to call out that right now we only have a month or two of data. So if we start seeing month over month declines of pending sales at 7% again every month, that’s going to be a concern. That is something that could lead to a crash. But right now we see that it went down 7% month over month, and we also have some other data suggests that it’s not going to free fall. So there’s this other data set that we use to measure demand. It’s called the Purchase Demand Index. It’s put out by the Mortgage Bankers Association, but it basically measures how many people are applying to get a mortgage for a new home.
This isn’t refinancing, it’s just going out and buying a new home. And although that has fallen in recent months, it’s actually started to go back up. Just the last couple of weeks, mortgage rates have fallen and we’re seeing people jump back into the market. And that is encouraging to me. There is some fear when you start to see these things that people are really going to get nervous and they’re going to permanently leave the market. But instead, what we’re seeing is that people are just super mortgage rate sensitive, which makes sense, right? So now that we’re seeing mortgage rates back down in the low sevens instead of the high sevens, people are jumping back in. So to me, at this point, that doesn’t suggest we’re going to see pending sales fall every single month. And instead, we’re most likely going to see, yes, lower pending sales and lower demand than we had a year ago and maybe than we had in the first half of 2026.
But as of right now, there’s no reason to think that it’s going to just free fall and the bottom’s going to fall out. So given all that, the question that we have to ask ourselves is yeah, demand has gone down and it was already pretty low and it’s gone down a little bit more if that is going to lead to a crash. And I would say as of right now, the answer to that is no. And I know a lot of people are out there saying demand is already low, it went lower, that’s a reason for a crash. But that is not true because you can’t just take demand on its own and then predict a crash. You have to look at the balance between supply and demand. That is what matters. It is not the absolute amount of demand that matters. When you are looking at prices, if demand and supply stay in proportion to each other, even if they’re both low, prices can stay the same or more likely in the scenario they can go down but not crash.
And because demand is down a little bit, we need to see and ask ourselves, is supply also going to come down a little bit or what’s going on in the supply side of the equation? And so yeah, demand is weaker and there is a risk. I’m not saying that there is no risk here. Demand has gotten worse and that introduces new risk to the market, something that we need to keep an eye on. But if you’re asking here today as I’m recording this, is demand bad enough that a crash is imminent? I would say no. Now we should ask ourselves, could that change? Because of course it can, right?This stuff is always changing. The episode I’m recording is a point in time. And so there’s basically two risks that can change this and make it way worse. The first is probably obvious, but that’s just mortgage rates going up even higher.
They’ve been moving back down in the last couple of weeks, but if they went up to 8%, 9%, yeah, I think that’s serious risk. That gets us to maybe, I don’t know if it’s crash territory, but could we see five, 10% declines in home prices next year if we got to 9% mortgage rates? Yeah, we could. That world is possible. But as of right now, the bond market has stabilized a bit. We’ve seen mortgage rates go down a little bit. And so again, is that imminent? No, it doesn’t look like it. The other risk though is the labor market because we all hear the crazy negative scary things about AI stealing everyone’s jobs. And next year, instead of me, you could be hearing a robot host this podcast instead. And there’s risk, right? We don’t really know. These AI companies, their business model is kind of to cause mass unemployment.
And so we have to see if that’s going to come to fruition. And if we see unemployment go up to six, seven, 8%, then yeah, I do think we could see demand erode. That is a big risk, but that is speculation. Unemployment has fluctuated a bit over the last couple years, but still in the low fours, which for context is still very low. And so unless that changes and go up a lot, again, I don’t see imminent risk, but these are things to watch for. These are the things that I will continue to update you on on the show is if mortgage rates go higher, if labor market starts to crack, that could really take us into more dangerous territory. But as of right now, it doesn’t look like that’s coming in the next couple of months at least. And anything beyond that, we’re just speculating about what could happen.
The evidence does not support that that is happening. All right, so again, demand gotten worse, but not in a free fall, at least that we know of right now. We’ll keep an eye on that. But what about the supply side? Because again, either changes to supply or demand could put us into a crash and we need to look at the balance. This is the really important thing is looking at the combination of both and we know what’s going on with demand. We will look at the supply side right after this quick break. Stick with us.
Welcome back to the BiggerPockets Podcast. Today on the show, we’re doing crash map. We’re looking at the mechanics of how a crash actually works and not just fear mongering, not just saying things are going great. We’re going to look at the actual economics behind this. How do supply and demand look in the housing market? And then we can assess really what level of risk there is in the market. So we need to turn to the supply side now. And for that, we look at a couple of different data sets, but the two most important in my opinion are inventory and new listings. Inventory is just a measure of how many homes are for sale at any given point in the market. And that is super helpful because it is a measure of supply and demand at the same time. When inventory is going up, it means there is more supply than demand.
When inventory is going down, it is the opposite. And you can imagine why this is true, right? Because if inventory is going up, that means more homes are sitting on the market and people aren’t scooping them up and buying them. Right now, what we see is that inventory actually hasn’t gone up that much. So if you just look at where we are this year compared to last year, it’s surprisingly kind of flat, but I think it’s going to go up. Again, I am speculating. My job as a data analyst is to look at the data, figure out where things are trending, and my guess is that it is going to go up. Now, there are a couple reasons for this. First and foremost, inventory going up is something that we’ve been hoping for for years. So just keep that in mind, is that during the pandemic we had these artificially low levels of inventory and some reversion back to normal levels of inventory was inevitable.
We were already seeing that when mortgage rates were going down that the lock and effect was starting to break and people are starting to list their homes for sale more and more, and that’s good. I was happy about that. That gets us to a more balanced and a healthier housing market. But what I think is going to happen now is two different things with inventory, and it’s important to understand the distinctions here. First is that new listings are going to go down. Now, there’s two ways to measure inventory and supply on the housing market, and new listings is one of them. This is people who put their home or property on the market for the first time in a given month. The other one is active inventory. That’s the total amount of properties that are for sale at any given time. And so the first one just measures new properties.
The second one, active inventory, measures new properties plus all of the old properties that haven’t sold. And so what I see happening here with inventory is that new listings actually starting to go down. And I predicted this a couple months ago because when mortgage rate goes up, that lock-in effect that we’ve been talking about where sellers don’t want to sell because they have these amazing low mortgages that they don’t want to get rid of, that lock-in effect gets stronger, right? They have less of an incentive to sell right now if they’re going to have to go out and get a seven and a half percent mortgage. Plus affordability for buyers is lower, and so they’d probably have to take a lower price to sell their property. And so anyone who’s not forced to sell or is kind of on the fence about selling is just going to choose not to.
And so what we’re seeing, and I think will continue, is lower new listings. And when we think about the balance of supply and demand, I talked about before, when demand comes down, if supply comes down at the same time, prices can stay in equilibrium. And we are seeing lower new listings, but there’s a big but here. I do think that second category of active listings is going to go up because even though there are less new listings, the properties that do get listed are going to sit on the market longer. And so my expectations, I actually made these predictions over the summer publicly, and so far they have been correct, is that new listings would come down, but we would see active inventory go up. And when we see active inventory go up, I don’t think it’s going to be crazy because new listings are going down, but this could lead to price declines because we’re talking about the balance of supply and demand.
If we have more supply and less demand, we will get price declines. That’s just how it works. But it’s all relative. Are we seeing a huge reduction in demand and a huge increase in supply? No. We are seeing a reduction in demand and a modest increase in supply. And that to me is why we can expect modest declines in prices, but not a housing market crash. But of course, the fears people have are understandable at least because given what has happened in this country and the housing market over the last couple of decades, so you’re not wrong to wonder could that change in the future? Because the data, the new listings, the mortgage purchase applications, that helps us understand maybe a month or two or three in advance, but what about a year in advance or two years in advance? Could the things that happened in 2008 that not many people saw coming, could stuff like that be lurking in the background, not showing up in the data, could that come to bite us in the butt?
Because inventory looked fine in 2005, right? Well, luckily we have more data about that. We can look at some of the things that were brewing behind the scenes in 2008 and see if those are likely to happen again. And that data is mortgage delinquencies and foreclosures, because what happened in 2008 is not that all of a sudden a ton of people who own their home were happily living and doing whatever they do decided, I just want to sell my home right now, and they all did it at once. That is not what happened. What happened was that people fell behind on their mortgages and they were forced to sell. That is what ultimately drove up supply in 2008 is that people were going to get foreclosed on and they were forced to sell. And just a quick reminder of why that happened is there was very loose credit standards back then where basically anyone could go out and get a loan.
There were things called ninja loans, which are no income, no job kind of loans. They weren’t checking. People were just saying what their income was and it was really the wild, wild west. And another thing that happened during that time is a lot of those loans were adjustable rate mortgages. And so they would give what were called teaser rates. So the loan officers would go out and say, “Oh, you don’t have a job. Well, you’re going to pay 2% interest rate on this mortgage.” And people say, “Great, I can afford that.” But there were adjustable rate mortgages and then a year or two or three years later, whenever that interest rate adjust, all of a sudden those people who did not have a thorough vetting of whether they could pay back that mortgage couldn’t pay back that mortgage. And so they fell behind on their mortgages and ultimately many of them got foreclosed on.
And that created that spiral I talked about before. More supply hit the market that started to push home sales prices down slowly. People got spooked. Some demand left the market. That made home prices fall more than the layoff started and it created the spiral where supply was really up and demand was really down. And so let’s look at that. Is that likely to happen in 2026 or in the coming years? Well, as of right now, the evidence again says no. If you look at the delinquency rate, which I really see as the canary in the coal mine for another 2008 style crash. Now, could a crash materialize in a different way because of AI or something? Sure. Yeah, that can definitely happen. But forced selling is brought on by people falling behind on their mortgages as measured by delinquencies. And so when I look at the data, I can tell you right now that the national delinquency rate of mortgages is 3.53.
If you’re curious what it was in 2003 and 2004, it was above 4%, so it was higher than it is now. If you were curious where it was in 2008 and nine, it peaked at 10, 11%. So way, way, way higher. Now again, similar to new listings and inventory, people are going to say, “But delinquency rates are up.” Sure, they are up compared to 2021 and 2022 when there were mortgage forbearance programs and foreclosure moratoriums going on. That was a very unusual time in the housing market. So to compare today’s delinquency rate to 2022 does not make any sense. Of course, it is going to go up when those programs end. That is what’s to be expected. But if you look at the delinquency rate to say 2019, the last time we had a quote unquote normal housing market, it is below that level. So keep that in mind.
The delinquency rate in a historical context is still relatively low. Now, for a little while, it was starting to tick up, and I’ve said this on this show, I’ve said it on the market, that I would keep an eye on these things to let you know if these things change because to me, again, this is the canary in the coal mine. If we start to see delinquencies go up, the probability of a crash changes. We got to take one more quick break. We’ll be right back.
Welcome back to the BiggerPockets Podcast. I’m Dave Meyer, and today we’re talking about crash math. Right now, there are basically two sort of small areas of concern in the mortgage market, FHA loans and VA loans. Earlier this year, we saw the delinquency rate on FHA loans go up pretty considerably, but good news, those have actually started to level out. They’re still some of the highest they’ve been in the last 10 years or so, but seeing them start to level out, again, suggests that we are not in some sort of free fall where everything is going crazy. They went up and now they’re stabilizing. VA loans are sort of on a similar trajectory, but they haven’t leveled off. So we need to keep an eye on those, but just keep in mind that VA loans, FHA loans make up a pretty small portion of the mortgage market.
And so even if these go up a little bit, it’s not like it’s going to lead to some flood of delinquencies and foreclosures, but it is worth keeping an eye on. If you look at foreclosures, which are just sort of further down the funnel than delinquencies, they’re ones that don’t get cured and actually get auctioned off or short saled or whatever. And if you look at those, the same pattern is existing. They are gone up from pre-pandemic lows when there are all these programs in place, but they’re already starting to level off. They’re elevated from last year. You will see things that foreclosures are up 20 or 30% year over year. Those things are true. That is accurate. But the foreclosure rate in a historical context is still very reasonable. You cannot compare a time period where the government was saying you can’t foreclose on people to right now and say, “Hey, look, foreclosures went up.” That’s ridiculous, right?
You got to compare it to historical records. And right now, foreclosure rates look okay. I personally think they’ll probably keep going up. I’m not that worried about that. Will they go up to reversion to the mean to get closer to the average? Probably. You’ll probably still see some more headlines about it. But the idea that there is forced selling and a foreclosure crisis could be around the corner, again, it could happen if the unemployment rate goes crazy, but evidence right now, no. But we can even actually go one step further because you could, as a crazy analyst who wants to understand everything, do you want to understand what a lead indicator is for delinquencies? Can we look forward and see if delinquencies are likely? It’s not perfect, but there are some data sets we can look at. I like looking at credit quality, which is basically just like who are taking out mortgages and how good are their credit scores.
And check this baby out. I’m going to put this up for anyone who’s looking at this on YouTube, but you could just see this chart. It shows the average credit score of people who are taking out mortgages over time. It goes all the way back to 2003 to now. So it’s the last 23 years of data. And what you can see on this chart is that subprime mortgages where people have a credit score of 620 or less, basically disappear. I would have to take out a magnifying glass to look at this chart to be able to see the little line there at the bottom where subprime mortgages are. They basically do not exist. Even the loans to people who are in the 620 to 660 range, extremely low. By far, the biggest group, and I will say this is well above half of people who are taking out mortgages, not just now, but for the last 10 years or so, have a credit score of 760 or better.
Think about that. That is an elite level credit score. That is who is taking out mortgages. And that does not mean they’re immune from financial trouble. There are a lot of problems with credit scores. They’re not a perfect measure. But if you look at that alone and you say, are the things that led to the 2008 crash likely to happen again where subprime loans or people who couldn’t pay back their mortgages even when they got those mortgages, is that going to take down the housing market? Super, super, super unlikely. Subprime loans are gone. Credit quality is good. So when we look at all of this data together and ask ourselves, could a crash happen? Yeah, of course. To me, as I said, the risk is really in the labor market going south. If people start to lose their jobs in a serious way due to AI or anything else, that changes things.
That’s why I said at the beginning of this year, if you listen to some of my prediction episodes, I said that the probability of a crash was like 10%. It’s always like five or 10%. There’s always a chance that these things happen. It’s probably actually lower than that given we’ve had one real crash in the last hundred years. You could argue that it’s a 1% chance. I think it’s a little bit higher than that just because affordability is low. But that’s mostly emotional though, me saying 10%, because when you look at the data, really no evidence that it’s around the corner. So for 2026 at least, 10 at the most, I think, probability of a crash. For 2027, might be a little higher just because it’s further out. The risk is always higher the further out because your predictions are less good. But for now, just think about it.
Supply and demand, right? Demand is up, supply is up a little bit. This is the environment for relatively flat prices. It’s why I’ve been calling this the great stall because even though supply and demand are low, neither one of them is moving in either direction, and that is a perfect example of when prices stay flat. Now over the next year, are they going to go up a little bit, down a little bit, one or 2% in either direction? Sure. Yeah, but probably pretty flat. We’re in the great stall and no one knows what the future brings but evidence, which is the best thing we can do. All we can do is look at data and evidence and make informed decision, and the evidence suggests a crash remains very unlikely. All the other headlines you’re hearing are people who are reacting based on emotion, who don’t understand how housing market works or deliberately trying to mislead you.
The data is actually pretty clear about this today despite those headlines. So although I never tell you what will happen, I always try and tell you what will happen in probabilities. You may notice that, but I have been trained to say that as an analyst, you say this is the most likely thing to happen, this is the least likely thing to happen because no one knows. That is the only honest answer. But from where I sit, the probability of a crash in 2026 remains very low. Hopefully now that you understand some of the data and mechanics behind how a crash can happen, you can see this for yourself, and if you want to, you can track it for yourself. But I also give housing market updates on this podcast one time per month, and at the end of each of those episodes, I do a risk report, and you can check that out where I talk about the risk of a crash because I’m not trying to hide this from anyone.
If there is a crash coming and I thought that, I would tell you. I promise you I would tell you that. But for the last four or five years, I’ve been pretty right about the direction of housing prices. I said they would still go up in 2023, even though people were freaking out about mortgage rates. In 2024, I said they would go up modestly. I said they’d be close to flat last year. Those have all been right. I’ve said it’s going to be flat, maybe a little bit down this year. That’s looking pretty right right now too. I’m not trying to brag there will be a time that I am wrong, but I do give you my honest assessment. I am not trying to hide information here, and a flat market going forward is my honest assessment of what is most likely to happen. Stability and projecting out with a decent degree of confidence what’s likely to happen is all you can ask for as an investor to make decisions by, and hopefully this episode has helped you do just that.
Thank you all so much for watching this episode of the BiggerPockets Podcast. I’m Dave Meyer and I’ll see you next time.

Dave:
Home sales in the US just hit a record low. This isn’t a soft patch. It’s not a seasonal dip. This is serious. Pending sales just fell to the lowest level ever recorded by Redfin and NAR. And this isn’t just happening in one or two metros. They fell in every single one of the 50 biggest metros in the country. And here’s the thing, this might be the new normal. Everyone’s sitting around waiting for mortgage rate relief to kick the market back into gear, but that might not happen soon. You might be waiting a while for that. And for that reason, I think it might be a very cold winter for the housing market. So today on On the Market, we’re going deep on the winter housing market. Why sales are falling off a cliff, why inventory is rising for the wrong reasons, where rates are heading next year, and what it all means for your investing strategy going into 2027.
This is On the Market. Let’s get to it.
Everyone, welcome to On the Market. I’m Dave Meyer, real estate investor, housing analyst, chief investment officer at BiggerPockets. We are now entering that time of year when the market usually just slows down. Kids are back in school, the weather turns, buyers take a break, and this is totally normal. But what I’m seeing in the data right now isn’t just a seasonal slowdown. I think there is something more going on here. The big headline that you need to know is that demand in the housing market has really started to fall. And this is a change from recent years. Despite what people say on social media about no one wanting to buy, that’s actually not true. Demand has actually been pretty steady the last few years. Sure, it is lower than it was in COVID, but it’s actually been pretty steady. And as of earlier this year, before the war in Iran started, demand was actually starting to go up.
But now we are seeing it turn in the other direction and this could really change dynamics in the housing market. Two months ago, I made a prediction about what was going to happen about the market and it looks to be coming true. So I kind of want to share with you all that prediction. If you didn’t see it, I made it on social media, but I’ll share with you because I am starting to see this market take shape in a way that actually makes sense to me. And I want to share with you what I think is coming next. But before we get into this episode, I want to share with you something pretty fun that we’re doing at BiggerPockets. We are doing our first ever workshop on scaling up. We are taking two full days in person with some of the biggest experts in the industry to help investors who maybe have a couple of units, maybe you’re doing well, but you want to take that next step.
You see the great stall, this period that we’re in right now as a great buying opportunity to set up your portfolio for years to come and you want to figure out the strategy that’s going to get you there. That is exactly what we’re doing at this two-day live event in Phoenix, Arizona. It’s happening this December 5th through 7th. We have amazing speaker lineup. We have myself, Kathy Fecke, James Danner, who you know from the show. We also have Devon Kinard and we have a couple other speakers that we haven’t even announced yet, but these are some of the best speakers in the whole country. And it’s not just going to be lectures, people speaking at you. This is going to be super hands on. You’re going to have a whole strategy template that you’re going to be filling out. So you’re going to walk away with a specific action plan for 2027 and beyond.
We just launched tickets a couple days ago, so grab yours today. We actually, we’re only selling a hundred seats. So if you want to go, go get your tickets right away. They’re going to sell out. Go to biggerpockets.com/conferences to learn more. All right, with that, let’s get into today’s episode of On the Market. And I’m going to start by giving you my take. Over the late summer when bond yields started to rise, I said publicly on social media, I made a prediction, people were going crazy saying all these insane things. I made a prediction about what I actually think is going to happen in the housing market. No hype, no fear mongering. And I said four things were going to happen. The first one is that transaction volume, the number of homes that are sold in any given month or year would fall because we’d have lower demand.
Number two is that new listings, the amount of people who choose to put their home on the market, that would go down. That’s a really important thing. I said that would go down, that less people would choose to sell. The third thing is that inventory would rise because even though new listings are down, homes that are listed sit idle and the total number of properties for sale, which is inventory, that would go up. And then number four is that prices would turn negative nominally within the next year. Nominally just means not inflation adjusted. The headline number I think will turn negative. Those were my four predictions. Transaction volume down, new listings down, inventory up, prices down. Let’s see how I’m doing because we’re getting a lot of data now just starting the last couple of weeks since interest rates went up. Over the summer, that data is not as relevant because rates, they’re in six and a half, but now we’re at seven and a half.
That’s a totally different affordability climate that we’re in right now. We’re starting to get the data and we can see if this prediction is right. First, we’re going to just look at the first prediction, which was about pending sales falling. And this one unfortunately is correct. I don’t want to be right about this, but this is the big scary number. This is the reason I’m making this episode is because we just got data that showed that pending sales, again, number of homes that go under contract or transact, depending on who you ask, went down 14% in just a single month. And pending sales is a really important metric here because it tells us two things. First, it tells us that transactions are going down. We don’t have our total home sales numbers, but pending sales, things that go under contract is a lead indicator for that.
So we know that the market is already going to be slow and it was already slow before this happened. Just for some context, annualized home sales right now are at about four million. Normal in the housing market is about five and a quarter million. So we’re well below that. In COVID, it shot up to six and a half million. So that’s why it feels so slow. Well, because it’s below COVID and because it’s below normal, we’re at a very, very slow and stagnant housing market. Now we’re seeing that drop double digits in a single month. Now it might recover, but this is concerning, especially anyone who works in the industry. If you’re an agent, if you’re a loan officer, I’m sorry, this really stinks in already a difficult time and I don’t know if it’s going to change, but this stinks. The second thing is that it just tells us about home buyer sentiment.
It tells us that fewer people want to buy homes. This is what you look at pending sales for is you say, how many people are actually going to the closing table and signing or putting something under contract unless people want to do that. So we know that demand is falling and it makes sense because affordability is lower. And so you would expect demand to fall off, but it’s below the point where it was two years ago when mortgage rates were this high or higher, right? They were seven and a half. They hit 8% a couple of years ago and demand didn’t fall this much. Now it is falling. And I mentioned this at the top of the show, but just wanted to call out that pending sales declined all across the country. I looked at all 50 of the most populous cities in the country and they fell two weeks in a row in all the places.
So we are seeing that no matter what you look at, you can look at the Redfin data, you can look at the NAR data, it is not good. In fact, if you look at the NAR data, one of the scary things here is that if you look at the NAR data, which goes back to 2001, and it’s their lowest pending sales of the whole data series. So yeah, even lower than the great financial crisis, 2007, 2008 had higher pending sales than what we’re seeing right now. And if you’re curious, places that are getting the hit the hardest are places like Seattle where I live, I’m seeing this absolutely. It’s down almost 30%. San Diego is down 25%. Atlanta 24, Denver 21, Las Vegas 21. So it’s happening all across the country, but really bad in certain markets. Now, if you’re wondering why this is happening, there’s two reasons and you could probably answer the first one for yourself.
If you listen to the show, you probably know by now that the answer is affordability. It’s just less affordable to buy a home because mortgage rates have shot up this year and particularly in the last couple of months. But just for some context, in just the last year alone, the average payment on a mortgage went up over 10%. That is really significant to a buyer’s budget. Just since September of 2025 to now, we’ve had high rates for a while, but just in the last year it’s gone up 10%. So no wonder people are leaving the market. That has to be one of the reasons. But the other reason, maybe even the bigger reason, I don’t know, but another major reason here is psychological, at least in my opinion. I think there are a couple things going on here. First and foremost, people are tired. I think a lot of people have been waiting for prices to come down, waiting for rates to come down.
They’ve just been wanting to find something that’s affordable. Now they’re seeing rates go up again and it just kind of feels like we’ve seen this story before. We’re tired. Maybe we’re just going to rent or we’re going to sit it out for a while or maybe we’re just going to stop looking for the next year. I don’t know, but I think that’s a major reason. The second thing is I think people are finally giving up on the date the rate, marry the house idea. And I am personally glad about that. You’ve probably heard me rail against that advice for years now. I think it’s terrible advice. No one knows which way interest rates were going. I said this back in 2023, that it was bad advice because interest rates could keep going up or they could stay really high and people made fun of me and said I was crazy, but you know what?
Look at where we are right now. Mortgage rates are higher than they were in 2023. They’re at 7.5%, and I think people are not buying it anymore. They’re not buying homes thinking, “Oh, I’ll just refinance in a year or two because now we’ve had four years of higher rates. They’re going in the wrong direction and there’s no end in sight to this.” Well, there might be. We’re going to talk about that in a minute, mortgage rates. But I think people are just saying, “You know what? I’m not doing that anymore. I’m not going to pretend that I can refinance for sure.” And I think that’s a good reason, but it’s going to pull demand out of the market because people are going to wait until rates come down to a tolerable level and rates come down to a level that buyers feel comfortable with for the next 30 years potentially.
So that’s what’s going on with pending sales. So if you’re keeping scoring my prediction, nailed this one, this one was easy. When prices go up like this, pending sales usually go down, doesn’t usually happen, but this one was pretty easy to see. And yeah, pending sales are down. And I think this is probably the number one thing to watch in the next two months, I would say, is pending sales. If they keep going down, it’s going to get rough for real estate, both in terms of transaction volume, and I think it’s going to translate to price declines. Not a crash again, but I think we’re going to see it’s going to be tough to sell a home. Keep an eye on pending sales because to me, this is a huge story in the housing market right now. Hopefully you understand why it’s such a big story and what it can mean for the housing market in general.
So talked about pending sales. Let’s talk about my other predictions where what’s going to happen with new listings, inventory and prices. We’re going to grade my predictions, but we got to take a quick break. We’ll be right back.
Welcome back to On the Market. I’m Dave Meyer. We’re talking about the winter housing market. I made predictions over the late summer about what I think was going to happen once the bond market started going crazy. And I said, first pending sales were going to go down and they have. I also said inventory is going to go up, but the critical, the hot take here, the one that I think a lot of people are actually getting wrong, I said that new listings were going to go down. Let’s see how we’re doing. Well, inventory, the one that I think is the easier prediction is up. If you look at active listings year over year according to realtor.com, according to everyone, is up. It’s up 5% year over year. Not crazy, but frankly, I think we’re kind of just at the beginning of it. Again, like I said, not exactly a hot take to say that when pending sales are going to go down, inventory is going to go up.
That’s a well-known relationship, but there is a lot of nuance here. Inventory is actually sort of a complicated metric. Inventory can go up and down for lots of different reasons. It’s a great thing to track if you care about the housing market because it measures both supply and demand and it measures the balance of supply and demand. Just for example, if supply goes up and demand stays the same, prices tend to go down because there’s more homes for sale, same amount of buyers. The other thing can happen too, right? Supply can go down, demand can go up. It can do all these different things, but it tells us a lot about where the market’s heading. And over the last couple of years, since COVID at least, I think most people who watch and care about the housing market have wanted more inventory because that would take us out of this crazy seller’s market that we’re in for a really long time and get us closer to balance.
But you kind of want inventory to go up only if it’s for the right reasons, like the good kind. And right now it’s not going up for good reasons. Let me explain. My prediction was that new listings would fall and inventory would go up, and both of those things turn out to be correct so far. New listings is a measure of how many people choose to sell their home in any given month. Inventory is the total amount of homes that are for sale at any given time. So inventory tracks not just what got put on the market this month, but all of the backlog too, everything else that has been listed for sale over months or years ahead of that actual month. And what we’re seeing right now is that new listings, the people who chose to sell their home in September went down. It went down almost 1% year over year, which isn’t crazy, but it was going up year over year just a couple of months ago.
So this is a big shift in what’s going on in the market. And what it tells us is that inventory isn’t rising because sellers are all of a sudden flooding the market. It’s rising because buyers aren’t absorbing the homes that are already there. And this is the single most important distinction in this episode that you need to pay attention to because a lot of people will point to rising inventory and say, okay, this is going to be a crash and there’s always a chance of a crash, don’t get me wrong. But in 2008, inventory was surging because people were flooding the market with new listings because we were seeing lower demand and higher supply. And when that happens, that’s the environment for a crash. Those are the ingredients for a crash. Right now though, we’re seeing lower demand, but we’re also going to see some lower supply.
Depends how you measure it. Active inventory is going to go up, which is why I think prices are going to come down, but we are not seeing forced selling. The people who can choose not to sell are choosing not to sell. You can see it right here in the data, and this is why I keep saying that the most likely outcome is a stall and declining prices, but not a crash. Yes, there are fewer buyers and that stinks, but sellers are reacting exactly how you would expect in a correction, not a crash. If there was going to be a crash, new listings would be up, not down. Now that’s not always the case, right? You could have no new listings and no one buys a home for a couple of years, but in almost any crash scenario, you would need new listings to probably go up.
And I’m not saying that can’t happen in the future if there’s a black swan event or unemployment goes crazy or the stock market blows up or there’s a war, who knows? But as of right now, the fact that new listings are going down tells us that a crash remains unlikely, but a correction is the likely course that we’re going to take. Again, not any different from what I’ve been saying for two or three years now about the market, but we are going to see lower transaction volume and the inventory that goes on the market is going to sit longer. That’s my take on it. That’s what I think is going to happen. And so far the evidence is backing up my predictions. Before we move on though, I also just want to add some context because you’re going to see headlines, you’re going to see people on social media saying inventory’s going up, there’s going to be a crash.
I want to provide some context. As I said, active listings inventory is going up. It’s about 5% up year over year, but it is still below where we were in September of 2019. Just keep that in mind. If you just sort of take the most obvious data and sort of look at this logically and not think of conspiracy theories or plan out black swan events that could happen, if you just look at what’s happening today, it does not look like a crash is materializing. Instead, it looks like a classic correction. And that’s why I don’t know if my fourth prediction has come true yet. I said that nominal home prices were going to come down at some point in 2027 and I’m sticking by that. I think all the ingredients are there for correction. We have inventory going up, we have less demand, we have low affordability, all ingredients for a correction.
The new listings for selling piece that takes you from a correction to a crash is not there. And that’s why, although it’s going to be a cold, tough winter, if you’re selling a home, it’s going to be rough, but I don’t think we are in panic mode right now. I will let you know if that changes, but right now the data does not suggest that. Anything else is speculation. You’re free to speculate. We’re in a very uncertain world, so go ahead and speculate away, but I just want to tell you the evidence as of where we sit today remains correction, not crash. And I should mention, as I do all the time on the show, that this environment makes a good buyer’s market, right? I’ve been looking at a lot of stale listings, looking at things that have been on the market for 30, 60, 90 days, had recent price cuts, and there are a lot of them.
If you’re a buyer right now, you have all the leverage. There are so many sellers competing for you right now. And so if you’re a buyer, negotiate hard. We’ll talk about that more in a minute, but just remember, correction does not mean it’s a bad time to buy. It means you have to buy smart, but you can still do it. So again, pending sales down, new listings down, inventory up, all correct. We’ll see if my prediction about nominal hold prices is right, but I just want to, again, provide a little bit more context. As of right now, top 50 biggest markets in the country, 17 of them are already negative in nominal terms. So that’s about a third of the biggest markets. It’s kind of a lot, right? Only eight markets are growing faster than inflation. That’s not a lot, right? You want your properties to grow faster than inflation, and there’s only eight markets rightnow.
It’s Chicago, Hartford, Milwaukee, New York, Cleveland, San Francisco, Kansas City, Province, Rhode Island. That’s it. The other 25, the other literal half are still up in nominal terms, again, in non-inflation adjusted terms, but they’re growing slower than inflation, which to me is another sign of a correction. And if I had to guess right now where we’ll be a year from now, I’d say almost all, if not every one of them is below the pace of inflation, maybe not San Francisco, 49 out of 50, let’s say, if the AI bubble keeps going. 49 out of 50 will be below the pace of inflation. I’d say at least more than half of them are down in nominal terms, maybe more than 60, 70%. That’s my prediction where we’re sitting today, unless of course mortgage rates come down. And we’re going to talk about how that is possible right after this quick break.
Stick with us.
Welcome back to On the Market. I’m Dave Meyer. Today we’re talking about the winter housing market conditions. We’ve talked about pending sales, inventory, new listings, and prices. Now let’s talk about the variable. It’s the big lever that could get pulled in the housing market and its mortgage rates. We all know this. We’ve been talking about it for four years, but we’re starting to see a lot of major forecasters who have been predicting lower rates for a long time change their tune. Just as an example, Fannie Mae, they came out with their October forecast and they’re predicting 7.5% interest rates on a 30-year fixed mortgage rates for the entirety of 2027. That’s up from 6.7%. That’s what they were predicting. Just a month earlier, they were saying 2027, we’re going to have 6.7%. Now a month later, they said actually it’s going to be 7.5% all year.
That is a huge difference. That is a really big difference in psychology of the buyers and in actual affordability. An 80 basis point revision in one month, that doesn’t happen a lot. That is a big move for a forecast, and we’re seeing this across the board. It’s not just Fannie Mae, it’s happening everywhere. And if you haven’t been paying attention, the reason rates are high and the reason that they’re stuck is because of the bond market. Treasury rates have shot up. They’ve been pretty volatile over the last couple of days. I’m recording this towards the end of October, and they were up to as high as 5.3%. There’ve been some hope about the end of the war in Iran and they’re down to about 5%. But even still, even if they stay around this 5% rate, we’ll still have low sevens, maybe high sixes for next year, and that’s going to be pretty tough, right?
I think it’s beyond just inflation and the war. I think bond investors are starting to get worried about the national debt and the potential inflationary pressure there in the US, and a lot of Western Europe is facing this crisis as well. And on top of that, US bonds are facing competition from AI, and so that’s going to push up bond yields as well. And so right now, the status quo, if nothing big changes, I’d say probably somewhere between 6.75 and 7.75 is the forecast for next year. That’s not my official prediction. I will make a prediction in December, but that’s kind of where I’m seeing it right now. It could also get worse, I should say. If inflation gets worse, if oil prices go up, it could definitely get worse, but there are actually two scenarios where mortgage rates do get better. The first is the end of the war in Iran, and that’s why we’ve actually seen mortgage rates start to come down a little bit in just the last week, this last week of October, is because there’s been some hope that oil prices are going to go down, that’s going to reduce the pressure on inflation, that’ll bring down bond yields, and that will bring down mortgage rates.
So that is number one, and that would be great, right? Hopefully there is a positive resolution and prices start to come down. Inflation is always sticky, will take a while, but ending the war or oil prices falling would do a lot for mortgage rates and bond yields to fall down. That’s number one. The second scenario is a recession. Almost all of the time when there is a recession or adverse economic conditions, bond yields fall and mortgage rates fall. And this is because when we’re in a recession or the stock market crashes or corrects or whatever, a lot of people take their money out of risky assets like the stock market and put it into safe assets, which is bonds. And the more money that pours into bonds, the lower interest rate the government has to pay, and that takes down bond yield, it takes down mortgage rates.
And this is why I often subscribe to this idea, there’s this theory about recessions where real estate is, they call it first in, first out, because real estate is very, very sensitive to mortgage rates and to interest rates. We all are seeing this. And so when rates go up like they have, real estate usually gets hit first. It’s exactly what we’re seeing. The stock market’s doing well, corporate earnings are doing well, unemployment rate is still pretty low relatively speaking, but real estate has been in a recession for four years and it’s getting worse, right? So we’re first in, but the idea is that once the rest of the economy starts to falter and goes into a recession, other sectors start to go into a recession. Just imagine the stock market tanks. Then what happens is people put their money in bonds that drives down mortgage rates and that helps real estate recover.
So we’re also, even though we’re first into the recession, we’re first out because affordability improves in real estate before a lot of other sectors, and that helps bring the whole economy out of a recession. I subscribe to this belief. Now, I don’t know if there’s going to be a recession, but if there is one, it could help set the bottom for the housing market. That happens often. But as of right now, I don’t see a big recession coming at least in the next couple of months. I think it’s like a fifty fifty shot if there’s a recession in 2027. Now, I’ve gone on this show many times and complained about the definition of recession, that there really isn’t one. It’s entirely subjective. I have even created my own metric and way to measure recessions. I call it the Main Street recession. If you can go back and listen to those episodes, and by my measure of recession, we are in one, but my redefinition of a recession is not enough to change the bond market, unfortunately.
I don’t have that power just yet. So will we see GDP contraction? I think it all depends on what happens with AI, right? AI is propping up the stock market, it’s propping up GDP, and if AI keeps going, then I don’t think there’s a recession. I’ve said before on the show, I think there is a bubble here and I think that it is going to pop whether it pops in 26, 27, 28, I have no idea. But when you look at the revenue these companies are creating versus their debt, it just doesn’t make sense. It really doesn’t. Look at the map. It doesn’t make sense. That’s not to say AI is not an incredible technology, that it’s not going to change the world. I think it will, but I think the asset values are very unreasonable. I don’t know how else to say it. It’s just unreasonable.
And I do think that could lead to a recession. And of course, no one likes a recession, but that could bring down mortgage rates. That’s the point here. And so if you’re wondering how long this lasts, you have to ask yourself, when do one of those two things happen? When does the war end and we get lower inflation or when do we get a recession or both? And I just want to make clear that if one of these two things happen or both of them happen, that still doesn’t mean we’re necessarily going back to 4% mortgage rates or 3%. Maybe if there’s something crazy that happens, but these could bring us down into the sixes. Maybe they can bring us down into the fives, but it really depends on other things. And so that’s why right now, because don’t know if there’s going to be a recession, how bad it will be.
We don’t know about a resolution of the war. We have to plan for seven and a half percent mortgage rates. That’s the only reasonable thing to do as an investor or a buyer right now or a seller. It’s the only reasonable thing to do. Now, you can make your own speculations about if those things are going to happen. I certainly have my own opinions about them, but I am not using those opinions to inform my investing decisions. I am a hundred percent in on seven and a half mortgages. That’s everything you underwrite right now. Cap rates are going to expand. Mortgages are going to stay high. That’s how to think about it. And this hasn’t changed. This is the opinion. This is the advice I have given on the show for years now. Use this scenario. Sellers know that interest rates are 7.5%. They know they have to compete for buyers.
That is what has changed in the last six months. They’re no longer holding the cards. Buyers are holding the cards. I’m trying to buy and sell. I can tell you for sure, because I’m on both sides of transactions, buyers are holding all the cards right now. So use it. Negotiate hard, underwrite at today’s rates, hunt for motivated sellers, know the pockets of your market that are going to recover quickly and find good deals. You absolutely can. When I say it’s a cold winter for real estate, what I mean is transaction volume. It’s going to be slow. It’s going to be a sluggish market. It’s going to be cold for sellers. It’s going to be tough out there, but for buyers, that’s where opportunity lies. So that’s my read on the market. It’s not all that changed from what I’ve been saying for the last several years.
I still think the great stall is the most likely scenario. Even if we get lower mortgage rates, I don’t think the market’s going to take off all of a sudden unless we have huge drop to mortgage rates, which I think would only come from a Black Swan event at this point, but you can invest in the Greg Stall. When there are times when sellers are motivated, like right now, that’s when you buy. Now you should buy below market comps for sure, but this is when you buy. When people are worried and fearful and are willing to offer deals, I could tell you, I’m a seller, it stinks. I’m willing to offer deals because there’s properties I want to get out of, want to raise cash and go buy other things. Other sellers are thinking the same way. So that is what I recommend all of you think about as we head into this winter.
But things are changing fast and I will absolutely be providing updates just like this at least once a month, maybe more if something changes, but at least once a month because we just saw, look, pending sales change dramatically in a single month and it’s really changing how sellers and buyers are behaving. And so if you’re an investor, if you’re working in this industry, stay tuned because I’ll be providing deep analysis into what’s going on in the market every single month with shows like this. But we’re doing it twice a week here on On the Market. So make sure to subscribe, stay tuned so you can stay ahead of the market that’s coming. That’s our episode for today. Thank you so much for watching this episode of On the Market. I’m Dave Meyer. I’ll see you next time.

Turnkey rentals are built on a simple promise: The provider delivers a rent-ready home, places a tenant, lines up property management, and gives the buyer a projection of what the property will rent for. That home can be a newly built property or an older house that the provider has rehabbed or renovated before the sale. Because many turnkey investors never see the home in person, the rent projection carries a lot of weight in the decision to buy.

Rent to Retirement (RTR) is a turnkey single-family rental provider. According to the company, about 80% of its inventory is new construction, and the remaining 20% is older homes that it rehabs or renovates.

RTR decided to put its own track record to the test. The company opened its sales records to an independent third party, which reviewed 3,090 homes RTR sold between 2017 and 2026. The reviewers matched 2,763 of those homes to public resale records and compared projected rent with investor-reported rent on 740 of them.

The results speak to three questions every turnkey investor should ask:

1. Do buyers hold on to their properties? 
2. Do the owners who sell get more than they paid? 
3. Does the projected rent actually show up?

Most Buyers Hold for the Long Term

The homes RTR sold in 2017 and 2018 have the longest ownership record in the review, since their buyers have had seven to eight years to decide whether to sell.

Of the 489 homes RTR sold in those two years, 369 are still owned by the original buyer, which works out to 75.5%. Among 2018 buyers, 79.2% still own their homes, and among 2017 buyers, 71.1% still do.

RTR credits much of that staying power to its scale. The company works with builders, lenders, and property managers in each of its markets, and those relationships help owners solve repair, vacancy, and financing problems early. RTR also encourages its investors to work through setbacks instead of selling, because its entire model is built around long-term ownership.

Owners Who Held Sold Above Cost

The review found 148 recorded resales among RTR homes. The median home sold for 1.41 times its original purchase price, and three out of four sold for more than the buyer paid.

The longer owners held, the better their results were. Owners who held for four years or more sold above their purchase price 96% of the time, and their median sale price ranged from 1.57 to 1.86 times what they paid. Owners who sold within two years broke even at the median.

For owners who held for at least two years, sale prices rose by a median of 8.7% per year. That figure reflects the sale price alone, so an owner’s total return also depends on the rent they collected, how they financed the home, and what they spent to operate it.

Sale prices varied for the investors who chose to sell. RTR points out that the investors who still own their newly built homes started from a strong position. Through its builder relationships, RTR secures institutional-level buyer incentives that the company says exceed anything publicly available on the MLS. Those incentives give RTR investors better terms on the purchase than a typical buyer would get on the open market.

Most RTR investors never sell at all. According to RTR, its typical investor holds for seven to nine years, and many use that window to refinance and pull out cash or to trade up through a 1031 exchange. Both strategies let owners stay invested and keep building equity.

Most Rents Landed Right on Projection

Rent is the number a turnkey buyer relies on most. Among the 740 homes with both a projected rent and an investor-reported rent, the median home rented for exactly what RTR projected.

In total, 598 homes, or 80.8%, collected at least 95% of their projected rent, and 476 homes, or 64.3%, landed within 5% of the projection in either direction. One Alabama home bought for $332,400, for example, was projected to rent for $2,350 a month and rented for exactly that amount.

No forecast is perfect, and the homes that came in below 95% of their projection fell short by a median of 15%. On a $2,000 monthly rent, that gap would be about $300, so investors should keep cash reserves on hand for any rental they own.

Ohio Projections Were the Most Accurate

Projection accuracy varied by market. Ohio, which makes up RTR’s largest rent sample with 355 homes, had 94.9% of homes rent at or above 95% of their projection. Tennessee and Alabama followed closely at 89.5% and 89.1%.

Florida rents ran softer than the other states in the review. Just under half of Florida homes, 46%, reached 95% of their projection, and the median Florida home rented for 93% of the projected amount. Investors looking at Florida properties should build a little more cushion into their numbers.

Lower-Priced Homes Hit Projection Most Often

The purchase price showed a similar pattern. Homes that sold for under $150,000 reached at least 95% of their projected rent 97.5% of the time, while homes priced above $350,000 did so 51.2% of the time.

Lower-priced homes also delivered stronger gross yields, which measure annual rent as a share of the purchase price. The median gross yield was 10.8% for homes under $150,000 and 7.7% for homes above $250,000.

What to Check Before You Buy

A pro forma is a projection made on closing day, so investors should know what a good one includes. A useful pro forma lists every expense, including a vacancy allowance and money set aside for large repairs. It also spells out the loan terms, which lets a buyer test how the deal holds up if rent comes in lower or a repair costs more than expected.

It also helps to ask any turnkey provider for its track record by market and by price point, since RTR’s data shows how much those two factors can matter. From there, buyers should complete the standard due diligence: an inspection, a review of comparable rents from a local property manager, a careful read of the management agreement, and their own quotes for insurance and taxes.

What This Means for Investors

Rent To Retirement’s records point to three clear takeaways:

1. Most early buyers still own their homes years later.
2. Owners who held for four years or more sold above cost almost every time.
3. The median home rented for exactly its projected amount.

Taken together, the data rewards investors who commit to a long-term plan. That means holding for years, keeping cash reserves for vacancies and repairs, and growing a portfolio steadily over time. Going from one door to two spreads the risk of holding just one property and improves the odds of building a strong portfolio.

If you have been investing in real estate for any length of time, you have probably heard about the “cost segregation for commercial real estate” that comes up in conversations about taxes.

But what I find most investors are missing is not just an understanding of what cost segregation does on its own. Investors need to understand how it fits into the bigger picture of how they are already building their portfolio. When you start pairing cost segregation with the strategies you are actively executing, the results can be significantly more powerful than treating it as a stand-alone tax move.

Here is how I think about it across the most common commercial real estate strategies.

Pairing Cost Segregation With the BRRRR Strategy

If you are running the BRRRR strategy (buy, rehab, rent, refinance, repeat), you are already used to thinking in cycles. You buy a distressed property, force appreciation through renovation, get it rented, pull your equity out through a cash-out refinance, and then roll that capital into the next deal. 

Cost segregation fits into this cycle in a way that most investors overlook. When you complete a renovation, many of the components you installed during that rehab are eligible for reclassification and accelerated depreciation. Improvements like new flooring, cabinetry, specialty lighting, HVAC components, and site improvements often qualify for five-, seven-, or 15-year depreciation lives instead of 27.5 or 39 years. 

If you commission a cost segregation study shortly after you stabilize and rent the property, you can generate a large depreciation deduction right at the moment when the property is producing income. That means you are offsetting income with accelerated deductions rather than waiting decades for the standard straight-line depreciation to catch up.

One important thing to understand here is that the study should be based on the total cost basis of the property, including your renovation costs, not just the original purchase price. Make sure the firm you hire knows how to work with properties that have been significantly improved.

Pairing Cost Segregation With 1031 Exchanges

This one is a little more nuanced, and it is where a lot of investors get confused. 

When you sell a property that you have run through a cost segregation study, you will face depreciation recapture on the accelerated deductions you took. Recapture is taxed at a maximum rate of 25%, which is lower than ordinary income rates but still a real number. A lot of investors see that and assume cost segregation was a mistake.

It was not. Here is why.

If you are planning to execute a 1031 exchange when you sell, the depreciation recapture is deferred along with the capital gain. You are not eliminating the recapture, but you are pushing it into the future while you continue deploying that tax savings into new properties. 

The accelerated deductions you took in prior years were real dollars saved at your marginal tax rate, often 32% to 37% for high earners. When the recapture eventually comes due at 25%, you have still come out ahead on the spread, plus you could use that money in the years between.

The key is to plan ahead. If you know a sale and 1031 exchange are on the horizon, talk to your CPA before you list the property, not after. The timing of when you identify and close on the replacement property affects how the entire transaction is structured.

Pairing Cost Segregation With Refinances

When you refinance a commercial property, you are not creating a taxable event. The cash you pull out is loan proceeds, not income, which is one of the reasons refinancing is such a powerful wealth-building tool. 

But here is where cost segregation adds another layer. If you refinance a property and use the proceeds to fund improvements or to purchase additional properties, a cost segregation study on the original property or the new acquisition can generate deductions that offset the income those properties are producing. You are essentially using the refinance to keep growing your portfolio while cost segregation keeps your taxable income in check.

This is especially useful for commercial properties that are cash flowing well. Strong cash flow is great, but it means more taxable income. Accelerated depreciation is one of the most effective tools for managing that income without having to sell anything.

Working With Your CPA

A cost segregation study is not a do-it-yourself project or something to hand off entirely to a firm without looping in your CPA. The best outcomes happen when your CPA and cost segregation provider are communicating before the study is ordered, not after the report lands in your inbox.

Your CPA needs to understand your overall tax picture. These are questions they should ask:

• Are you subject to passive activity loss rules? 
• Do you qualify as a real estate professional? 
• Do you have other passive income that could absorb losses? 
• Are you in a high-income year where accelerated deductions would be especially valuable? 

All those factors affect whether cost segregation makes sense right now, what type of property makes the most sense to study, and how the deductions will be claimed on your return.

A good cost segregation firm will want to have that conversation too. The ones that just send you a report without asking about your situation are not giving you the full service. The study is only as useful as the tax strategy behind it.

Cost Segregation for Commercial Real Estate: Timing Considerations for High-Income Years

This is the piece that I think gets the least attention and deserves the most. Accelerated depreciation is most valuable in years when your taxable income is highest. If you had a business sale, a large distribution, a significant capital gain from a real estate transaction, or any other event that pushed your income into the top brackets, that is the year you want large deductions available to you.

The problem is that most investors think about cost segregation after the year is already over, when they are sitting across from their CPA in January or February reviewing what happened. At that point, your options are more limited.

The better approach is to think about cost segregation proactively. If you know heading into a year that your income is going to be unusually high, pull forward a study on a property you already own or time the purchase and study of a new acquisition to hit in that same calendar year. Bonus depreciation, which allows you to take a large percentage of the reclassified assets as a deduction in year one, is the mechanism that makes this timing strategy so powerful.

Bonus depreciation percentages have been decreasing each year, so the sooner you act, the larger that first-year benefit will be. Do not let another high-income year go by without at least running the numbers.

Cost Segregation for Commercial Real Estate—Ready to Run the Numbers on Your Portfolio?

If you want to see what a cost segregation study could actually generate on one of your commercial properties, I recommend reaching out to Cost Segregation Guys. They are the firm I point investors toward when I want someone who will do the job right: licensed engineers on every project, documentation that holds up under IRS review, and a team that understands how real estate investors actually operate.

Cost Segregation Guys offers a free analysis upfront so you can see the potential benefit before you commit to anything. Whether you are in the middle of a BRRRR cycle, planning a 1031, or just sitting on a commercial property that you have never studied, they are worth a conversation.

Find them at CostSegregationGuys.com.