Home Real Estate We’re entering the next stage of the housing market downturn—3 things to expect heading forward

We’re entering the next stage of the housing market downturn—3 things to expect heading forward

by Ozva Admin

“I would say if you are a homebuyer, someone or a young person looking to buy a home, you need a little Restart. We need to get back to a place where supply and demand are back together and where inflation is low again and mortgage rates are low again.” Powell told reporters.

Whenever a central bank moves from monetary easing to monetary tightening, there will be an impact on a rate-sensitive sector like real estate. That impact, of course, will be even greater when monetary tightening comes after the asset class (residential real estate)increased 43% in just over two years. Powell admitted that in June. However, Powell did not commit to whether the impact of the rate would push home prices lower.

Fast-forward to September, and we no longer need to wonder if the housing “reset” will affect home prices. In June, the US housing market was still in the first innings of a sharp drop in real estate activity. Since then, we have seen real estate activity, including home sales and home construction levels, drop a lot. But as the August data comes in, we now have clear evidence that the housing market downturn it has moved from the first stage (ie a sharp decline in real estate activity) to the second stage (ie falling house prices).

“The longer [mortgage] rates remain elevated, our view is that housing will continue to feel it and will have this reset mode. And the affordability restoration mechanism right now that has to happen is in [home] prices. And so there are a lot of markets across the country where we forecast home prices to drop by double digits,” says Rick Palacios Jr., head of research at John Burns Real Estate Consulting. Fortune.

Let’s take a deeper look at the three elements that will change as we move into the second stage of the housing market downturn.

1. The house price correction is spreading.

As mortgage rates rose—going from 3.2% to 6.3% this year—industry insiders knew it would cause a sharp contraction in real estate activity. However, many housing optimists thought it would not lower prices. In March, Zillow went so far as to predict another 17.8% rise in home prices over the next year..

It is clear that the housing bulls were wrong. Among the 148 regional real estate markets tracked by John Burns Real Estate Consulting, 98 housing markets have seen home values ​​drop from their 2022 peaks. Single 50 markets still booming.

In 11 markets, the Burns home value index* has already been reduced by more than 5%. That includes an 8.2% drop in San Francisco home values. While it’s common for median list prices to drop this time of year, it’s not common for home values ​​or “offsets” to drop due to seasonality. In a nutshell: the house price correction is more acute, and more widespread, than previously thought.

A growing chorus of research companies, including moody’s Analytics, John Burns Real Estate Consulting, Zonda and Zelman and associates—expect this house price correction to continue through 2023. From peak to trough, Moody’s Analytics believes US house prices could soon fall 5%. In real estate markets significantly “overvalued”, Moody’s Analytics believes that the price drop could range between 5% and 10%. If a recession sets in, Moody’s Analytics predicts those price declines would double. But even that scenario would still be below the Peak to trough US house price drop of 27% we saw between 2006 and 2012.

There are still some businesses that don’t think the home price correction, fueled by reduced affordability created by high mortgage rates, will last until 2023. That includes Zillow. The Seattle-based housing listing site acknowledges that 62% of housing markets should experience a decline in home values ​​in the third quarter of 2022. However, Zillow economists predict that only 28.5% of markets are headed for declines year over year between August 2022 and August 2023.

2. The housing slump will soon extend beyond housing.

Year after year, the continuing housing recession has seen new home sales Y Existing Home Sales they fall 29.6% and 20.2%. Real estate firms like Redfin, Realtor.com, and Compass have already issued layoffs. Homebuilders are canceling projectsweather some mortgage lenders are on the verge of bankruptcy.

That said, most of the financial pain from the housing recession has been contained within the real estate industry. That is about to change.

Goldman Sachs researchers recently published an article titled “The Housing Recession: Beyond the Crash.” The investment bank anticipates that US housing GDP it will fall 8.9% in 2022 and another 9.2% in 2023. In the run-up to the Great Recession, which officially began in December 2007, housing GDP fell 7.4% in 2006 and 21 .4% in 2007.

If Goldman Sachs is right, it will mean that contractions in the US housing market will soon spill over into the broader economy. That is not surprising. After all, the Federal Reserve has raised the Federal Funds rate in an attempt to slow the economy.

As homebuyers across the country put their search for housing on hold, homebuilders are pulling back. That sees a decline in demand for things like refrigerators, lumber, windows, and paint. Those economic contractions should, in theory, help curb runaway inflation.

“It’s [housing] not the goal, but [housing] is essentially the goal,” Bill McBride, author of the economics blog Calculated Risk, saying Fortune earlier this summer.

3. Sellers ask for waiting time.

As the pandemic housing boom fizzled out this summer, we saw an increase in inventory across the country. In bubbling marketslike Austin and Boise, that inventory jump was more than 300% between March and August.

But that inventory spike is already fading.

Active listings on Realtor.com increased by 106,900 homes in May. That was followed by 102,900 and 128,200 jumps in June and July. However, that slowed in August to just an inventory jump of 31,900. And for the rest of the year, Altos Research predicts inventory will drop.

What’s going on? For starters, sellers are realizing that buyers are no longer paying more. Rather than accept less, some sellers are simply waiting out the housing recession.

There is also the rate lock effect. The vast majority of outstanding mortgages have rates below 5%, with a large portion even below 3%. If they sell now, they would be giving up their historically low mortgage rate. That pay jump isn’t attractive to upgrade buyers.

“It’s going to be very, very difficult to persuade people to drop those incredibly low rates,” Palacios says. Fortune. While many industry insiders believe tight inventory will help prevent a housing crash, Palacios says it won’t be enough to stave off a home price correction.

Want to stay up to date on the housing recession? Follow me in Twitter a @NewsLambert.

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