We are entering the next phase of the housing market downturn – 3 things to expect in the future

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

When the central bank moves from monetary easing to monetary tightening, there will be an impact on an interest rate sensitive sector such as real estate. That impact will, of course, be greater when the monetary tightening comes after the asset class – residential real estate – has risen 43% in just over two years. Powell admitted it frequently in June. However, Powell was not committed on whether the price shock would push home prices down.

Fast forward to September, and we no longer need to wonder if a housing “reset” will affect home prices. Back in June, the US housing market was still in the early stages of a sharp decline in housing activity. Since then, we’ve seen a significant decline in housing activity, including home sales and home building levels. But as the August data rolls in, we now have clear evidence that the housing market slump has moved past that phase one (ie a sharp drop in housing activity) and into phase two (ie falling home prices).

“The longer that [mortgage] Prices remain high, we see housing will continue to feel and you will have that reset mode. And the affordability reset mechanism that must now occur is in the works [home] the prices. And so, there are a lot of markets across the country where we expect home prices to fall at a double rate,” says Rick Palacios Jr., head of research at John Burns Real Estate Consulting, luck.

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. Home price correction spreads.

With mortgage rates rising – from 3.2% to 6.3% this year – industry insiders realized it would cause a sharp contraction in housing activity. However, many housing bulls believed that it would not lead to lower prices. In March, Zillow went so far as to predict another 17.8% jump in home prices over the next year.

The housing bulls clearly got it wrong. Of the 148 regional housing markets tracked by real estate consultancy John Burns, 98 have seen home values ​​decline from their peak in 2022. Only 50 are still at their peak.

In 11 markets, the Burns Home Value Index* is already down more than 5%. That includes an 8.2% drop in home values ​​in San Francisco. Although it is common for median list prices to fall at this time of year, it is not uncommon for home or “company” values ​​to fall due to seasonality. Simply put: home price correction is More severe – and more widespread – than previously thought.

A growing group of research firms – including Moody’s Analytics, John Burns Real Estate Consulting, Zonda, Zelman & Associates – expect this home price correction to continue through 2023. Moody’s Analytics believes US home prices could soon fall 5%. In heavily “overvalued” housing markets, Moody’s Analytics believes price drops could range from 5% to 10%. If a recession emerges, Moody’s Analytics predicts that these price drops will double. But even that scenario would still be less than the peak-to-trough US home price drop of 27% we saw between 2006 and 2012.

There are still some companies that don’t believe the home price correction – driven by affordability pressure from rising mortgage rates – will move into 2023. This includes Zillow. The Seattle home listing site acknowledges that 62% of housing markets should see declines in home values ​​in the third quarter of 2022. However, Zillow economists predict that only 28.5% of markets are headed for annual declines between August 2022 and August 2023.

2. The housing downturn will soon spread beyond housing.

On a yearly basis, the continued downturn in the housing sector saw new home sales and existing home sales decline 29.6% and 20.2%. Real estate companies like Redfin, Realtor.com, and Compass have already laid off workers. Homebuilders are canceling projects, while some mortgage lenders are teetering on bankruptcy.

However, most of the financial pain of the housing downturn has been contained in the real estate industry. This is about to change.

Researchers at Goldman Sachs recently released a paper titled “The Housing Decline: More Falls.” The investment bank predicts that US housing GDP will decline by 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 by 7.4% in 2006 and 21.4% in 2007.

If Goldman Sachs is right, it means that contractions in the US housing market will soon extend to the broader economy. This is not surprising. After all, the Federal Reserve raised the federal funds rate in an attempt to slow the economy.

As home shoppers across the country pause their search for their homes, it’s causing home builders to hold back. This reduces demand for things like refrigerators, lumber, windows, and paint. These economic contractions should, in theory, help rein in hyperinflation.

“He. She [housing] Not the goal, but it [housing] It’s basically the goal,” said Bill McBride, author of the Calculated Risk Economics blog luck earlier this summer.

3. Sellers are calling out.

As the pandemic housing boom fades this summer, we’ve seen a jump in inventory across the country. In bubble markets, such as Austin and Boise, that stock jump was more than 300% between March and August.

But that rise in inventory is already fading away.

Active listings on Realtor.com jumped by 106,900 homes in May. This was followed by 102,900 and 128,200 jumps in June and July. However, that slowed in August to just 31,900 in stock. For the remainder of the year, Altos Research expects inventory to actually decline.

What’s going on? For starters, sellers understand that buyers have ended up paying the highest dollar value. Instead of taking less, some sellers are simply waiting for the housing sector to slow down.

There is also a file Lock rate in effect. The vast majority of existing mortgages have rates below 5% – with a significant portion even below 3%. If they sold now, they would give up their historically low mortgage rate. This jump in repayment is hardly attractive to buyers moving up.

“It would be very difficult to get people to give up on those insanely low rates,” Palacios says. luck. While many industry insiders believe a tight inventory will help prevent a housing crash, Palacios says it won’t be enough to prevent a home price correction.

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