We’re entering the next phase of a housing downturn — 3 things to look forward to

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

Whenever a central bank moves from easing to tightening, there will be an impact on an exchange rate sensitive sector like real estate. Of course, that impact will be even greater when the currency tightens after the asset class — residential real estate —skyrocketed 43% in just over two years. Powell acknowledged that in June. However, Powell made no secret of whether the interest rate shock would push home prices lower.

Fast forward to September, and we no longer need to question whether housing “resets” affect home prices. Back in June, the US housing market was still just early stage of housing activity plummeted. Since then, we’ve seen housing activity, including home sales and home construction levels, drop dramatically. But when the data arrives in August, we now have clear evidence that housing market downturn moved beyond that first phase (i.e. housing activity plummeted) and into the second phase (i.e. home prices fell).

“That long [mortgage] rates are still going up, our view is that housing will continue to feel that and have this reset mode. And the affordability reset mechanism now has to happen is on [home] price. And so there are a lot of markets around the country where we forecast a double-digit drop in home prices,” said Rick Palacios Jr., head of research at John Burns Real Estate Consulting. Luck.

Let’s take a closer look at three factors that will change as we move into the second phase of the housing market downturn.

1. The home price correction is spreading.

When mortgage rates skyrocket—increased from 3.2% to 6.3% this year—Those in the industry know that will cause a sharp decline in housing activity. However, many bulls think it will not drag the price down. March, Zillow predicts another 17.8% increase in house prices next year.

Obviously the real estate speculators were wrong. Of the 148 regional housing markets tracked by John Burns Real Estate Consulting, 98 housing markets have seen home values ​​fall from their 2022 peak. Only 50 markets still at their peak.

In 11 markets, house value index* has fallen by more than 5%. That includes an 8.2% drop in home values ​​in San Francisco. While it’s common for average listing prices to drop around this time of year, it’s not common for home values ​​or “forced” prices to fall because of seasonality. Simply put: The house price adjustment is sharper — and more common — than previously thought.

A growing choir of research companies — including Moody’s Analytics, John Burns Real Estate Consulting, Zonda, and Zelman & Associates—Expect this correction to continue into 2023. From peak to trough, Moody’s Analytics thinks U.S. home prices could soon fall 5%. In significantly “overvalued” housing market, Moody’s Analytics suggests a discount of 5% to 10%. If a recession hits, Moody’s Analytics predicts those downturns will double. But even that scenario would still be lower The peak-to-trough drop in US home prices of 27% we saw between 2006 and 2012.

There are still some companies that don’t think the home price adjustment – fueled by an affordability squeeze caused by soaring mortgage rates – will carry over into 2023. That includes Zillow. Seattle-based home listing website admits that 62% of the housing market will see home values ​​decline in the third quarter of 2022. However, Zillow economists predict that only 28.5% of the market is facing a decline compared to the same period last year from August 2022 to August 2023.

2. The housing downturn will soon spread beyond housing.

On a yearly basis, the ongoing housing downturn has seen new house for sale and Existing home sales down 29.6% and 20.2% respectively. Real estate companies such as Redfin, and Compass issued a dismissal order. Home builders are calling off projectswhile Some mortgage lenders are on the verge of bankruptcy.

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

Researchers at Goldman Sachs recently released an article titled “The Housing Recession: Beyond Fall.” Investment banks forecast that US 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 had fallen by 7.4% in 2006 and 21, respectively. 4% in 2007.

If Goldman Sachs is right, that means the US housing market will soon spread to 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 home shoppers across the country halted their home search, it prompted homebuilders to retreat. That reduced demand for things like refrigerators, lumber, windows and paint. In theory, those economic contractions should help curb rising inflation.

“It [housing] not the goal, but it [housing] basically the goal,” said Bill McBride, author of the economic blog Calculate Risk, told Luck early this summer.

3. Seller is calling timeout.

As the Pandemic housing boom hit this summer, we saw inventories skyrocket across the country. In vibrant marketlike Austin and Boise, inventory skyrocketed more than 300% between March and August.

But inventory has spiked.

Active listings on grew by 106,900 homes in May. This was followed by 102,900 and 128,200 in June and July respectively. However, that slowed down in August to just 31,900 inventory increases. And throughout the rest of the year, Altos Research predicts inventories will actually decrease.

What’s happening? For starters, sellers are realizing that buyers have already paid the top amount. Instead of taking less, some sellers are simply waiting for the housing downturn.

There are also rate lock effect. The majority of outstanding mortgages have rates below 5%—with a large portion even below 3%. If they sell now, they’ll give up historically low mortgage rates. That spike in payments is hardly appealing to buyers who are about to move up.

“It’s going to be very difficult to convince people to give up those crazy low rates,” said Palacios Luck. While many in the industry believe the tight inventory will help stave off a housing collapse, Palacios says it won’t be enough to prevent an adjustment in home prices.

Want to stay updated housing downturn? Follow me on Twitter in @NewsLambert.

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