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The central theses
- Home sales are down 20% year-on-year, prompting optimism among those looking to enter the real estate market.
- Economists predict home price growth will stall in 2023.
- The continued interest rate hikes by the central banks are worrying many experts about what this means for the real estate market.
In 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 forgoing home inspections to complete the sale, and offering all cash above list price without seeing the property since so many cities suddenly became unaffordable.
People who wanted to get into the real estate market were worried and wondered if they could ever afford to own a home.
Federal Reserve Chair Jerome Powell commented, “We’ve had a period of red-hot housing across the country…home prices have soared to unsustainable levels. We’re probably going to have to go through a correction in the housing market.”
It seems that house price growth may finally return to reality, at least that is the hope. Many optimistic homeowners have been patiently waiting for home prices to fall so they can finally get on 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 must first share some somewhat disappointing news for those looking to enter the real estate market in the near future. It’s not exactly a buyer’s market yet. Although home sales are down 20.2% year over year, the median selling price for existing homes is up 10.8% year over year, according to the National Association of Realtors (NAR). The median selling price for existing homes is currently $403,800, but is down from June’s record high of $413,800.
An economist from NAR stated that we are in a housing recession because there is a drop in home sales and construction. However, it is not a price recession as inventories are still high enough.
Potential buyers were hoping that the best time to enter the real estate market was around the corner. Many people have been saving in hopes of finally being able to buy a house at a reasonable price, but it doesn’t look like house prices will fall drastically anytime soon. However, there is good news for buyers.
No more bidding wars
The average home is selling below its list price for the first time since March 2021, according to data from Redfin. This is an important metric because it means the homes haven’t fallen off the list price for 17 months, so essentially very real real estate transactions probably had some sort of bidding war. We’ve all heard some of the chaotic tales of bidding wars and how desperate people were to enter the real estate market. If you’re a buyer, you don’t have to worry about getting caught up in an intense bidding war like some people had to do just a few months ago.
Redfin also announced that the number of discount homes for sale in June doubled year-on-year to 14.9%. This means that sellers had to be realistic with their expectations of the possible profit.
Redfin economists even predicted the post-Labour housing slowdown could be more intense this year, with expectations that homes could stay on the market longer than before. If a home stays on the market longer, there is the potential for homes to sell below list price more frequently in the final months of 2022. However, only time will tell if sellers are desperate enough to exit the market by liquidating for a much lower price.
What is a sign that house prices could fall?
There is a belief that increasing supply coupled with decreasing demand could result in lower property prices. The supply of new homes in the US surpassed the ten-month mark in July. This is the highest level since January 2009. The USA has been in a recession for more than 10 months. The number officially rose to 10.9 on August 23, 2000. Monthly supply is the term used to quantify the number of months it would take for the available inventory of homes in the current market to sell, considering the pace of sales. Monthly supply was at a record low of 1.9 months in December 2020.
Existing home sales in July fell 5.9% from the previous month, according to the National Association of Realtors (NAR). If home sales continue to fall, there’s a chance prices will fall as sellers don’t want to wait to find the perfect deal.
Redfin also reported that Google searches for the keyword “homes for sale” were down 27% year over year at the end of August. This trend could indicate that people are thinking twice about entering the real estate market as worries about rate hikes continue to flood the news.
Higher rents vs. much higher mortgage payments
Another problem in the real estate market is high rents, which are accompanied by even higher mortgage payments from landlords. In the past, many real estate investors have argued that the asset class generates decent returns. With rents increasing, it is difficult for a landlord to make a profit because mortgage payments have also increased. In addition to mortgage interest rates, insurance costs have also risen.
At the end of August it was announced that rents in July had reached a record high for the 17th month in a row. According to realtor.com, the national median rent hit a new record high of $1,879 per month in July, up 12% year over year. The rate of rent change is slowing, however, as the 10% year-over-year increase is the smallest we’ve seen since June 2021.
Mortgage payments have increased even more over the past year as rents have risen. The Mortgage Bankers Association said the average monthly mortgage payment was nearly 1.5Xx the monthly average asking rent for the second quarter. This would be the highest level recorded since 2009. If mortgage payments continue to rise, many potential investors will think twice about getting into real estate as an investment.
Why have mortgage payments skyrocketed?
The combination of higher home prices and higher mortgage rates has meant that mortgage payments have become prohibitive and intimidating. Interest rates were historically low during the lockdown, prompting a property boom. The real estate boom eventually led to bidding wars that priced out many hopeful buyers.
The S&P CoreLogic Case-Shiller US National Home Price NSA Index was released Aug. 30 and the numbers showed that home prices had risen 18% since June last year. To add another perspective, it looks like U.S. home prices have risen 40% since the pandemic began (from February 2020 to May 2022, to be precise). With high house prices and rising interest rates, mortgage payments have skyrocketed.
Will property prices fall?
It is difficult to predict exactly what will happen to the economy as the central bank continues to raise interest rates in an attempt to slow economic activity. However, it’s worth noting that Goldman Sachs has warned clients that house prices are likely to stall completely in 2023. They even went so far as to forecast that house price growth will remain at an average of 0% in 2023. While potential buyers can see this is positive news as prices aren’t going to continue to skyrocket and property prices have still risen significantly since the pandemic began.
However, there’s a big difference between stalled home price growth and falling home prices. Just because growth is faltering doesn’t mean prices will fall. Some experts believe domestic demand will remain strong due to a strong labor market and insufficient supply. With demand for homes so strong, it’s hard to imagine house prices falling sharply any time soon.
How should you invest?
It can be difficult to decide whether you should invest your money in a confusing real estate market these days. Investing in real estate becomes riskier when you factor in high interest rates and inflated real estate prices. On the other hand, you don’t want to be trapped at an astronomically high rate. On the other hand, you’re not sure if you should wait any longer for prices to drop to pre-pandemic levels, or if it’s even possible at this point.
An alternative is to invest in real estate by buying shares in companies that are correlated with the housing market. Q.ai offers investment kits with integrated REITs and other real estate positions.
bottom line
It’s no longer a sellers’ market for the reasons above, but we’re not quite living in a buyers’ market yet. The coming months will be a transition. There’s a plethora of data pointing in different directions, but it’s difficult to say with certainty when house prices will fall. Home 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 Chair Powell may be right it may be time for a correction in the housing market.
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