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

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

Every time a central bank moves from monetary easing to monetary tightening, there will be an impact on a rate-sensitive sector like real estate. This impact, of course, will be even greater when monetary tightening comes after the asset class – residential real estate – has soared 43% in just over two years. Powell admitted it in June. However, Powell did not commit to whether the rate shock would lower home prices.

Fast forward to September, and we no longer need to wonder if the housing “reset” will affect house prices. Last June, the US real estate market was still only at the beginning of a sharp decline in real estate activity. Since then, we have seen real estate activity, including home sales and home construction levels, go much lower. But as the data rolls in for August, we now have clear evidence that the housing market downturn has moved past that first stage (i.e. a sharp drop in real estate activity) and into the second stage (i.e. falling house prices).

“The longer it lasts [mortgage] rates remain high, we think housing is going to continue to feel it and have this reset mode. And the affordability reset mechanism that needs to happen right now is activated [home] prices. And so there are a lot of markets across the country where we expect home prices to drop in double digits,” said Rick Palacios Jr., head of research at John Burns Real Estate Consulting. Fortune.

Let’s take a closer look at the three elements that will change as we enter the second stage of the housing market downturn.

1. The house price correction is spreading.

As mortgage rates soared from 3.2% to 6.3% this year, industry insiders knew this would lead to a sharp contraction in real estate activity. However, many real estate bulls believed that this would not bring prices down. In March, Zillow went so far as to predict another 17.8% jump in house prices over the coming year.

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

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

A growing number 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 trough, Moody’s Analytics thinks that home prices in the United States could soon fall 5%. In significantly “overvalued” real estate markets, Moody’s Analytics thinks that prices could fall by 5% to 10%. If a recession hits, Moody’s Analytics predicts that these price declines would double. But even that scenario would still be lower than the 27% decline in U.S. house prices, from peak to trough, that we saw between 2006 and 2012.

There are still companies that don’t believe the house price correction — which is driven by a squeeze in affordability created by soaring mortgage rates — will continue into 2023. That includes Zillow. The Seattle-based real estate site acknowledges that 62% of housing markets are expected to see home values ​​fall in the third quarter of 2022. However, Zillow economists predict that only 28.5% of markets are heading for a decline year to year between August 2022 and August 2023.

2. The real estate recession will soon extend beyond housing.

Year over year, the continued slowdown in housing caused new home sales and existing home sales to decline 29.6% and 20.2%. Real estate companies like Redfin, Realtor.com and Compass have already made layoffs. Homebuilders are canceling projects, while some mortgage lenders are on the verge of bankruptcy.

That said, most of the financial pain from the housing downturn has been contained within the real estate sector. That’s about to change.

Goldman Sachs researchers recently published an article titled “The Housing Downturn: Further to Fall”. The investment bank predicts U.S. housing GDP to fall 8.9% in 2022 and another 9.2% in 2023. In the run-up to the Great Recession, which officially began in December 2007, the Housing GDP fell by 7.4% in 2006 and by 21.4%. in 2007.

If Goldman Sachs is correct, it means that contractions in the US housing market will soon spread to the entire economy. It’s not surprising. After all, the Federal Reserve raised the federal funds rate in an effort to slow the economy.

As homebuyers across the country put their home hunt on hold, homebuilders are stepping back. This leads to lower demand for things like refrigerators, lumber, windows, and paint. These economic contractions should, in theory, help curb runaway inflation.

“This [housing] is not the target, but he [housing] is basically the target,” said Bill McBride, author of the economics blog Calculated Risk, Fortune earlier this summer.

3. Sellers call timeout.

As the pandemic housing boom died down this summer, we saw stocks surge across the country. In bubbly markets, like Austin and Boise, that inventory jump was more than 300% between March and August.

But that inventory spike is already dying out.

Active listings on Realtor.com jumped 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 an inventory jump of 31,900. And for the rest of the year, Altos Research predicts inventories will fall.

What’s going on? For starters, sellers realize that buyers are done paying top dollar. Rather than take less, some sellers are simply waiting for the housing downturn to end.

There is also the rate lock effect. The vast majority of current mortgages have rates below 5%, with a large proportion even below 3%. If they sold now, they would forfeit their historically low mortgage rate. This jump in payment is hardly attractive to move buyers.

“It’s going to be very, very difficult to persuade people to give up these incredibly low rates,” Palacios said. Fortune. While many industry insiders believe tight inventories will help stave off a housing crash, Palacios says that alone won’t be enough to prevent home prices from correcting.

Want to stay up to date on the real estate downturn? Follow me on Twitter at @NewsLambert.

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