Powell predicts a correction on house prices, what does he see?

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Key learning points

  • Home sales are down 20% from a year ago, sparking optimism from those looking to get into the real estate market.
  • Economists predict that house price growth will come to a halt in 2023.
  • The ongoing central bank rate hikes have alarmed many experts about what this means for the real estate market.

Over the past few years, we’ve all heard so much about this hot real estate market. Stories surfaced of homes selling in record time, buyers foregoing home inspections to let the sale go through and bidding all the money above the sale price without seeing the property as so many cities suddenly became unaffordable.

People who wanted to enter the real estate market were concerned and wondered if they would ever be able to afford a house.

Jerome Powell, chairman of the Federal Reserve, noted, “We’ve had a time of scorching hot housing markets across the country… house prices have been rising at unsustainable levels. We will probably have to make a correction in the housing market.”

It seems that the rise in real estate prices is finally becoming a reality again, at least that’s the hope. Many optimistic homeowners have patiently waited for real estate prices to fall so that they could finally hit the market.

Is this a slow death for the seller’s market? We will try to understand the current real estate market.

It’s not a buyer’s market yet

We have to start by sharing somewhat disappointing news for those looking to enter the real estate market in the near future. It’s not really a buyer’s market yet. Despite home sales falling 20.2% from the previous year, the median resale price of existing homes rose 10.8% from last year, according to the National Association of Realtors (NAR). The average selling price of an existing home is currently at $403,800, but is below the record $413,800 in June.

An economist from NAR indicated that we are in a housing recession because there is a decline in home sales and construction. However, it is not a recession in prices as the stock is still high enough.

Potential buyers hoped that the best time to enter the real estate market would be right around the corner. Many people have been saving in the hope of finally being able to buy a home at a reasonable price, but it doesn’t look like real estate prices will drop drastically in the short term. However, there is good news for buyers.

No more bidding wars

According to data from Redfin, the average home is selling below list price for the first time since March 2021. This is an important statistic because it means homes haven’t fallen off list price for 17 months, so essentially the most real estate transactions probably had some sort of bidding war. We’ve all heard some of the chaotic stories about bidding wars and how desperate people are entering the real estate market. If you’re a buyer, don’t worry about getting into an intense bidding war like some people had to do a few months ago.

Redfin also announced that the number of homes for sale with price cuts doubled in June to 14.9% from the previous year. This means that sellers had to be realistic with their expectations for how much profit they could make.

Economists at Redfin even predicted that the after-work cooling in the real estate market could be more intense this year, with the expectation that homes could stay on the market longer than before. If a home stays on the market longer, there is a chance that homes will be sold below the selling price more often in the last few months of 2022. However, time will tell if sellers become desperate enough to exit the market by liquidating at a much lower price.

What is a sign that real estate prices may fall?

There is a belief that increasing supply combined with decreasing demand can lead to lower house prices. The supply of new homes in the US exceeded ten months in July. This is the highest level since January 2009. Every time it has been more than 10 months, the US has been in recession. The number officially went to 10.9 on August 23, 200. Monthly supply is the term used to quantify the number of months it takes to sell the available supply of homes in the current market, taking into account the rate of sales. The month’s supply was at a record low of 1.9 months in December 2020.

According to the National Association of Realtors (NAR), existing home sales fell 5.9% in July from the previous month. If home sales continue to fall, there is a chance that prices will fall as sellers don’t want to wait to find the perfect offer.

Redfin also reported that Google searches for the keyword “homes for sale” were down 27% at the end of August from the previous year. This trend could indicate that people are thinking twice about entering the real estate market as concerns about interest rate hikes continue to flood the news.

Higher rents versus much higher mortgage payments

Another problem in the real estate market was the high rents, which were accompanied by even higher mortgage payments by landlords. In the past, many real estate investors have claimed that the asset class delivered decent returns. With rising rents, it is difficult to make a profit as a landlord, because mortgage costs have also risen. In addition to mortgage interest, insurance costs have also risen.

At the end of August, it was announced that rents in July reached a record high for the 17th month in a row. According to information from realtor.com, the national median rent in July was the new record $1,879 per month, up 12% from a year ago. However, the pace of rent changes is slowing as the 10% year-over-year increase is the smallest we’ve seen since June 2021.

Because rents are rising, mortgage costs have risen even more in the past year. The Mortgage Bankers Association shared that the median monthly mortgage payment was nearly 1.5X the monthly median rent demanded for the second quarter. This would be the high level recorded with data dating back to 2009. If mortgage rates continue to rise, many would-be investors will think twice about real estate as an investment.

Why have mortgage payments skyrocketed?

The combination of higher house prices and higher mortgage rates has made mortgage payments unaffordable and intimidating. Interest rates were historically low during the lockdown, which led to a boom in the housing market. The real estate boom eventually sparked bidding wars that many hopeful buyers appreciated.

The S&P CoreLogic Case-Shiller US National Home Price NSA Index was released on Aug. 30, and the numbers showed home prices were up 18% from June last year. To add more perspective, it appears that US house prices have risen 40% since the start of the pandemic (from February 2020 to May 2022, to be exact). With high property prices coupled with higher interest rates, mortgage payments have skyrocketed.

Will house prices fall?

It is difficult to accurately predict what will happen to the economy as the central bank continues to raise interest rates to slow economic activity. It’s worth noting, though, that Goldman Sachs has warned its clients that home prices are expected to completely stagnate by 2023. They even went so far as to predict that home price growth will remain at 0% on average in 2023. this as positive news as prices will not skyrocket further, real estate prices have still risen significantly since the start of the pandemic.

That said, there is a huge difference between stagnant house price growth and falling real estate prices. The fact that growth is stagnating does not mean that prices will fall. Some experts believe that housing demand will remain strong due to a strong labor market and insufficient supply. With a strong demand for homes, it’s hard to imagine real estate prices going down any time soon.

How should you invest?

It can be difficult to decide if you should invest your money in a confusing real estate market right now. Investing in real estate becomes riskier when you factor in high interest rates and excessive real estate prices. On the one hand, you don’t want to be locked up at an astronomically high rate. On the other hand, you are not sure whether you should wait any longer for prices to fall to pre-pandemic levels or if that is even possible at the moment.

An alternative is investing in real estate by buying shares of companies that correlate with the housing market. Q.ai offers investment kits with built-in REITs and other real estate holdings.

Bottom Line

It’s no longer a seller’s market for the reasons mentioned in this article, but we’re not quite a buyer’s market yet. The next few months will be a transition. There is a variety of data pointing in different directions, but it is difficult to say for sure when real estate prices will fall. House price growth appears to be slowing, but the jury is still out on when prices will fall and how far they will go. Federal Reserve Chairman Powell may be right, it could be time for a housing correction.

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