We are entering the next phase of the housing market downturn: 3 things to expect moving forward

“I would say that if you are a home buyer, someone or a young person looking to buy a house, you need some Reset. We need to go back to a point 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 shifts from monetary easing to monetary tightening, there will be an impact on a rate sensitive sector such as housing. That impact, of course, will be even greater when monetary tightening comes after the asset class – residential real estate – peaked at 43% in just over two years. Powell admitted this in June. However, Powell did not commit to whether the rate shock would push house prices lower.

Fast forward to September and we no longer need to wonder if the “restoration” of housing will affect house prices. In June, the US housing market was still only at the beginning of a sharp decline in real estate activity. Since then, we’ve seen real estate activity, including home sales and home construction levels, go much lower. But with the arrival of the August data, we now have strong evidence that the downturn in the housing market has moved beyond the first phase (i.e. a sharp decline in real estate activity) and into the second phase (i.e. the decline in real estate). house prices).

“The longer it is [mortgage] the rates remain high, our opinion is that the accommodations will continue to feel it and have this mode of restoration. And the accessibility restoration mechanism at this moment that needs to happen is active [home] prices. And so there are many markets across the country where we expect 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 shift as we move into the second phase of the housing market downturn.

1. The correction in house prices is spreading.

As mortgage rates rose from 3.2% to 6.3% this year, insiders knew it would cause a sharp contraction in real estate activity. However, many real estate bulls thought it would not bring prices down. In March, Zillow went so far as to forecast another 17.8% increase in house prices over the next year.

It is clear that the real estate bulls have been wrong. Of the 148 regional real estate markets monitored by John Burns Real Estate Consulting, 98 real estate markets have seen home values ​​decline from the highs of 2022. Only 50 markets remain at their peak.

Across 11 markets, the Burns Home Value Index * has already fallen by more than 5%. This includes an 8.2% drop in San Francisco home values. While it is common for median list prices to drop at this time of year, it is not common for home values ​​or “comps” to drop due to seasonality. Simply put: the house price correction is sharper – and more widespread – than previously thought.

A growing chorus of research firms, including Moody’s Analytics, John Burns Real Estate Consulting, Zonda, and Zelman & Associates, expect this home price correction to continue into 2023. From peak to low, Moody’s Analytics believes property prices US homes may soon drop 5%. In significantly “overvalued” real estate markets, Moody’s Analytics believes that price declines can range from 5% to 10%. If a recession strikes, Moody’s Analytics expects price drops to double. But even that scenario would still be below the 27% drop in U.S. home prices from the peak to low we saw between 2006 and 2012.

There are still some companies that do not think that the correction in house prices, which is driven by a reduction in affordability created by the rise in mortgage rates, will be carried over into 2023. This includes Zillow. The Seattle-based home listings site acknowledges that 62% of housing markets are expected to see a decline in home values ​​in the third quarter of 2022. However, Zillow’s economists predict that only 28.5% of the markets are destined with year-over-year discounts between August 2022 and August 2023.

2. The housing crisis will soon extend beyond housing.

On an annual basis, the continuing real estate downturn saw new home sales and existing home sales decline by 29.6% and 20.2%. Real estate companies like Redfin, Realtor.com and Compass have already issued layoffs. Homebuilders are canceling projects, while some mortgage lenders are on the verge of bankruptcy.

That said, most of the financial pain of the housing crisis has been contained in the real estate sector. This is about to change.

Goldman Sachs researchers recently published a paper titled “The Housing Downturn: Further to Fall”. The investment bank expects US housing GDP to decline by 8.9% in 2022 and another 9.2% in 2023. Ahead of the Great Recession, which officially began in December 2007, housing GDP has declined 7.4% in 2006 and 21.4% in 2007.

If Goldman Sachs is right, it means the downturns in the US housing market will soon spread to the wider economy. It is not surprising. After all, the Federal Reserve raised the federal funds rate in an attempt to slow the economy.

As homebuyers across the country pause their search for homes, homebuilders retire. This sees a decrease in demand for things like refrigerators, lumber, windows, and paint. Such economic contractions should, in theory, help curb runaway inflation.

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

3. Sellers are calling the timeout.

As the pandemic construction boom faded this summer, we have seen a surge in inventories across the country. In sparkling markets, such as Austin and Boise, the jump in inventories 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. This was followed by 102,900 and 128,200 jumps in June and July. However, this slowed in August to an increase of only 31,900 inventories. And for the rest of the year, Altos Research expects inventories to actually decline.

What is happening? For starters, sellers are realizing that buyers have stopped paying the maximum. Rather than taking less, some sellers are simply waiting for the housing recession.

There is also the tariff blocking effect. The vast majority of existing mortgages have rates below 5%, with a large share even below 3%. If they sold now, they would forgo their historically low mortgage rate. That pay jump isn’t all that appealing to up and coming shoppers.

“It will be very, very difficult to get people to let go of those insanely low rates,” says Palacios Fortune. While many insiders believe limited inventory will help prevent a housing slump, Palacios says it won’t be enough to prevent home prices from correcting.

Do you want to stay updated on the real estate crisis? Follow me on Twitter at @NewsLambert.

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