We're entering the next phase of the housing downturn - 3 things ahead

We’re entering the next phase of the housing downturn – 3 things ahead

“I would say if you’re a home buyer, or a young person looking to buy a home, you need a little reset. We need to get back to a place where supply and demand are reuniting, inflation is down again, mortgage rates are down again,” Powell told reporters.

Whenever the central bank switches from monetary easing to monetary tightening, there are implications for interest-rate-sensitive sectors such as real estate. Of course, the impact is greater when there is a monetary tightening of the asset class (residential real estate) after surging 43% in just two years. Powell acknowledged this in June. Powell, however, did not comment on whether the interest rate shock would push down home prices.

Fast forward to September and we no longer need to question whether a home “reset” will affect house prices. Back in June, the U.S. housing market was still in the early stages of a sharp decline in real estate activity. Since then, we’ve seen a big drop in housing activity, including levels of home sales and home construction. But with the rollout of August data, we now have clear evidence that the housing downturn has moved beyond Phase 1 (i.e. a sharp drop in housing activity) and into Phase 2 (i.e. falling house prices).

“The longer [mortgage] Rates remain high and we think housing will continue to feel it and have this reset pattern.The affordability reset mechanism that must happen now is being activated [home] price.As a result, we are forecasting double-digit home price declines in many markets across the country,” Rick Palacios Jr., director of research at John Burns Real Estate Consulting, told Reuters wealth.

Let’s take a closer look at three elements that will change as we enter the second phase of the housing downturn.

1. The house price correction is spreading.

With mortgage rates soaring — from 3.2 per cent to 6.3 per cent this year — industry insiders know this will lead to a sharp contraction in real estate activity. However, many real estate bulls don’t think this will pull prices down. In March, Zillow even predicted that home prices would rise another 17.8% in the coming year.

Clearly, the real estate bulls got it wrong. Prices in 98 of the 148 regional real estate markets tracked by John Burns Real Estate Consulting have fallen from their 2022 peak. Only 50 markets are still at their peak.

In 11 markets, the Burns Home Value Index* has fallen by more than 5%. That included an 8.2% drop in home prices in San Francisco. While it’s common for median listing prices to drop at this time of year, it’s less common for home values ​​or “comps” to drop due to seasonality.In short: the house price correction is Sharper and wider than previously thought.

A growing number of research firms, including Moody’s Analytics, John Burns Real Estate Consulting, Zonda and Zelman & Associates, expect this price correction to continue into 2023. From peak to trough, Moody’s Analytics believes U.S. home prices could soon fall by 5%. In significantly “overvalued” real estate markets, Moody’s Analytics believes that price declines could range from 5% to 10%. In the event of a recession, Moody’s Analytics predicts a doubling of price declines. But even that would be less than the 27% peak-to-trough decline in US home prices we saw between 2006 and 2012.

There are still some companies that don’t think the home price correction (driven by the affordability squeeze caused by soaring mortgage rates) won’t carry over into 2023. That includes Zillow. The Seattle-based home listing site admits that home prices should fall in 62% of the housing market by the third quarter of 2022. However, Zillow economists forecast in August 2022 to August 2023.

2. The housing downturn will soon spread beyond the housing market.

The ongoing housing downturn resulted in new and existing home sales falling 29.6% and 20.2% year over year. Real estate companies like Redfin, Realtor.com and Compass have already announced layoffs. Home builders are canceling projects, and some mortgage lenders are on the brink of bankruptcy.

That said, much of the financial pain from the housing downturn has been contained in the real estate industry. This is about to change.

Goldman Sachs researchers recently published a paper titled “The Real Estate Downturn: Further Downside.” The investment bank forecasts that U.S. housing GDP will fall by 8.9% in 2022 and another 9.2% in 2023. Before the Great Recession, which officially began in December 2007, housing GDP fell by 7.4% in 2006 and 21.4% in 2007.

If Goldman Sachs is right, it would mean the contraction in the U.S. housing market will soon spread to the wider economy. This is not surprising. After all, the Fed raised the federal funds rate in an attempt to slow economic growth.

That has led homebuilders to retreat as homebuyers across the country pause their home searches. This has resulted in reduced demand for items such as refrigerators, wood, windows and paint. In theory, these economic contractions should help control runaway inflation.

“it [housing] not the goal, but [housing] It’s essentially the goal,” Bill McBride, author of the Economics blog Calculating Risk, told wealth earlier this summer.

3. The seller calls overtime.

As the pandemic housing boom fades this summer, we’ve seen a surge in inventory across the country. In frothy markets like Austin and Boise, inventories rose more than 300% from March to August.

But that inventory surge has faded away.

Active listings on Realtor.com increased by 106,900 in May. This was followed by jumps of 102,900 and 128,200 in June and July. However, this slowed to just 31,900 inventory builds in August. For the rest of the year, Altos Research predicts that inventories will actually decline.

How is this going? First, the seller realizes that the buyer has paid a premium. Rather than cutting back on purchases, some sellers are simply waiting for a downturn in the housing market.

and also Interest rate lock-in effect. The vast majority of outstanding mortgages have interest rates below 5%, with a large percentage even below 3%. If they sell now, they’ll forgo all-time low mortgage rates. This payment jump is hardly attractive to upgrade buyers.

“It’s going to be very, very difficult to convince people to give up on those crazy low interest rates,” Palacios told Reuters wealth. While many in the industry believe that tightening inventories will help prevent a housing crash, Palacios said it won’t be enough to stop a correction.

Want to stay abreast of real estate market downturns?Follow me on Twitter @NewsLambert.

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