- Home sales are down 20% from a year ago, leading to optimism for those looking to enter the real estate market.
- Economists expect home price growth to stop in 2023.
- The continued rise in interest rates from central banks is worrying many experts about what this means for the real estate market.
Over the past few years, we’ve all heard a lot about this hot real estate market. Stories emerged of homes sold in record time, buyers waived home inspections to get a sale, offering a 10% increase to the list price without seeing the property and many cities became too expensive. People who want to enter the real estate market have been worried and wondering if they could ever buy a home.
Federal Reserve Chairman Jerome Powell commented, “We have had a very hot time in the housing market across the country…House prices have been rising to an unsustainable level. Perhaps in the housing market we will have to go through a correction.”
It looks like real estate price growth may finally come true, or at least that’s the hope. Many optimistic homeowners have been patiently waiting for real estate prices to drop so they can finally enter the market.
Is this a slow death of 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 some slightly 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% from a year earlier, the median sale price of existing homes is up 10.8% from a year ago, according to the National Association of Realtors (NAR). The median selling price for existing homes is currently $403,800, but it’s down from the record price set in June of $413,800.
An economist from NAR pointed out that we are in a recession in the housing sector due to the decline in home sales and construction. However, it is not stagnation in prices because the inventory is still high enough.
Potential buyers were hoping that the best time to enter the real estate market was around the corner. Lots of people have been saving up hoping they could finally buy a home at a reasonable price, but it doesn't look like real estate prices will drop dramatically anytime soon. However, there is some good news for buyers.
No more house 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 metric because it means that homes haven't fallen off list price for 17 months, so, essentially, the most realistic type of real estate transaction is likely to be. From the bidding war. We've all heard some messy stories about the bidding wars and how desperate people were entering the real estate market. If you are a buyer, you don't have to worry about getting into an intense bidding war like some people only had to go back a few months.
Redfin also announced that the number of homes for sale with price cuts doubled to 14.9% in June from the previous year. This means that sellers must be realistic in their expectations of how much profit they can make.
Even the economists at Redfin had been expecting the after-action slowdown in the property market to be more intense this year, with expectations that homes could stay on the market for much longer than before. If the home stays on the market for much longer, there is a chance that homes will start selling below the listing price more frequently in the last few months of 2022. However, only time will tell if sellers are desperate enough to exit the market via liquidation. For a much lower price.
What is the indication of the decline in real estate prices?
There is a belief that an increase in supply combined with a decrease in demand can lead to lower housing prices. The supply of new homes in the US exceeded ten months in July. This is the highest level since January 2009. Every time more than 10 months have passed in the past, the US has been in a recession. The number officially went to 10.9 on August 23, 200. Viewing months is the term used to determine how many months it will take for the available inventory of homes in the current market to sell, given the velocity of sales. The month 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 compared to the previous month. If home sales continue to fall, prices will likely fall because sellers will not want to wait to find the perfect offer.
Redfin also reported that Google searches for the keyword "homes for sale" at the end of August were down 27% from the previous year. This trend may indicate that people are thinking twice before entering the real estate market as concerns about interest rate hikes continue to flood the news.
Higher rents versus higher mortgage payments
Another problem in the real estate market is the higher rents that are offset by higher mortgage payments by landlords. In the past, many real estate investors would argue that the asset class produces good returns. With rents rising, it's hard to turn a profit as a landlord because mortgage payments have gone up as well. Besides mortgage rates, insurance costs have also gone up.
In late August, it was announced that rents had hit a record high for the 17th consecutive month in July. According to information from realtor.com, the national median rent was at a new record high of $1,879 per month for the month of July, which is a 12% increase from last year. However, the rate of rent change is slowing, as the 10% year-over-year increase is the smallest we've seen since June 2021.
With the increase in rents, mortgage payments have increased even more over the past year. The Mortgage Bankers Association reported that the average monthly mortgage payment was nearly 1.5X compared to the average monthly asking rent for the second quarter. This would be the high level recorded with data going back to 2009. If mortgage payments continue to increase, many potential investors will think twice before entering real estate as an investment.
Why are mortgage payments soaring?
The combination of rising home prices and mortgage rates has made mortgage payments expensive and scary. Interest rates have been historically low during the lockdown, resulting in a housing boom. The real estate boom eventually led to bidding wars that left many optimistic buyers out.
The S&P CoreLogic Case-Shiller US National Home Price Index was released on August 30 and the numbers showed home prices had risen 18% over the past year as of June. To add more perspective, it appears that US home prices have risen 40% since the pandemic began (February 2020 to May 2022, to be exact). With rising real estate prices accompanying an increase in interest rates, mortgage payments have skyrocketed.
Are home prices on the way to decline?
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. However, it should be noted that Goldman Sachs has warned its clients that house prices are expected to come to a complete stop in 2023. They have gone so far as to predict that house price growth will remain at an average of 0% in 2023. While potential buyers may see So this is positive news because prices will not continue to rise, and real estate prices are still significantly high since the beginning of the pandemic.
However, there is a big difference between stagnating home price growth and lowering real estate prices. Just because growth stops, it doesn't mean prices will fall. Some experts argue that housing demand will remain strong due to a strong labor market and insufficient supply. With the strong demand for homes, it's hard to imagine real estate prices dropping dramatically anytime soon.
How should you invest?
It can be difficult to decide whether you should invest your money in the confusing real estate market at the moment. Investing in real estate becomes riskier when you take into account high interest rates and inflated real estate prices. On the other hand, you don't want to shut yourself out at an astronomically high rate. On the other hand, I'm not sure if you should wait any longer for prices to drop to pre-pandemic levels or if that is possible at this point.
The alternative is to invest in real estate by buying shares in companies associated with the housing market. Q.ai offers investment groups with REITs and other real estate functions built into them.
It's no longer a seller's market for the reasons mentioned in this article, but we're not quite a buyers' market just yet. The next few months will be a transitional period. There is a variety of data pointing in different directions, but it's hard to say for sure when real estate prices are going down. Home price growth appears to be slowing, but the jury is still out on when prices will fall and how far they will go. Fed Chairman Powell may be right, it may be time for a correction in the housing sector.