On Home Prices, Powell Forecasts A Correction, What Is He Seeing?

Key Takeaways

• Home sales are down 20% from a year ago, leading to optimism from those looking to get into the real estate market.
• Economists predict home price growth to stall in 2023.
• The continued rate hikes from the central banks have many experts concerned about what this means for the real estate market.

For the past few years, we have all heard so much about this hot real estate market. Stories popped up about houses sold in record time, buyers foregoing home inspections to get the sale through, offering all cash above the listing price without seeing the property as so many cities suddenly became unaffordable.

Folks who wanted to enter the real estate market were worried and wondering if they would ever be able to afford a home.

Federal Reserve Chair Jerome Powell commented, “we’ve had a time of a red-hot housing market all over the country… housing prices were going up at an unsustainable level. We probably in the housing market have to go through a correction.”

It appears that real estate price growth may finally be coming back to reality, at least that’s the hope. Many optimistic homeowners have been patiently waiting for real estate prices to drop so that they could finally get into the market.

Is this a slow death to the seller’s market? We will attempt to make sense of 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 who are looking to enter the real estate market in the near future. It’s not exactly a buyer’s market yet. Despite home sales being down 20.2% from the previous year, the median existing-home sale price went up 10.8% from last year, according to the National Association of Realtors (NAR). The median existing-home sale price currently sits at $403,800, but it’s down from June’s record high of $413,800.

An economist from NAR indicated that we’re in a housing recession because there’s a decline in home sales and building. However, it’s not a recession in prices since the inventory still remains high enough.

Potential buyers were hoping the best time to get into the real estate market would be around the corner. Many people have been saving up in hopes of finally being able to purchase a home at a reasonable price, but it doesn’t appear that real estate prices will drop drastically any time soon. However, there’s some good news for buyers.

No more bidding wars

According to data from Redfin, the average home is selling below its list price for the first time since March 2021. This is an important metric because it means that homes didn’t drop from the list price for 17 months, so essentially, most real estate transactions likely had some sort of a bidding war. We all heard some of the chaotic stories of bidding wars and how desperate folks were getting to enter the real estate market. If you’re a buyer, you don’t have to stress about getting into an intense bidding war like some folks had to just a few months back.

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

Economists at Redfin were even predicting that the post-Labor cooldown in the real estate market could be more intense this year, with expectations that homes could linger on the market for longer than before. If a home stays on the market for longer, there’s potential for homes to start selling below the listing price more frequently in the last few months of 2022. However, only time will tell if sellers get desperate enough to exit the market by liquidating for a much lower price.

What’s a sign that real estate prices could drop?

There is a belief that rising supply combined with decreasing demand could lead to lower home prices. The supply of new homes in the US crossed above ten months in July. This is the highest level since January 2009. Every time it’s been over 10 months in the past, the US has been in a recession. The number officially went to 10.9 on August 23, 200. Months’ supply is the term used to quantify the number of months it would take for the available inventory of homes on the current market to sell, considering the sales pace. 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 slid 5.9% in July from the previous month. If home sales continue to slide, there’s potential for prices to drop since sellers won’t want to wait around to find the perfect offer.

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

Higher rents vs. much higher mortgage payments

Another issue in the real estate market has been high rents matched by even higher mortgage payments by landlords. In the past, many real estate investors would argue that the asset class produced decent returns. With rising rents, it’s difficult to turn a profit as a landlord because mortgage payments have also gone up. Along with mortgage rates, insurance costs have also gone up.

In late August, it was announced that rents hit a record high for the 17th month in a row in July. According to information from realtor.com, the national median rent was at the new record hgh of $1,879 a month for July, which is up 12.% from a year ago. The rate of rent change is slowing, however, as the 10% YoY increase is the smallest we’ve seen since June 2021.

As rents increase, mortgage payments have increased even more over the last year. The Mortgage Bankers Association shared that the median monthly mortgage payment was almost 1.5Xx as much as the monthly median asking rent for the second quarter. This would be the high level on record with data going back to 2009. If mortgage payments continue to increase, 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 led to mortgage payments becoming unaffordable and intimidating. Interest rates were historically low during the lockdown, leading to a housing boom. The real estate boom eventually led to bidding wars which priced out many hopeful buyers.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index was released on August 30 and the numbers showed that home prices had risen 18% over the last year as of June. To add further perspective, it looks like US home prices went up 40% since the pandemic started (from February 2020 to May 2022, to be accurate). With high real estate prices matched with increased interest rates, mortgage payments have skyrocketed.

Are home prices going to be falling?

It’s difficult to predict accurately what will happen to the economy as the central bank continues to raise interest rates to slow down economic activity. However, it’s worth noting that Goldman Sachs has warned its clients that home prices are expected to stall completely in 2023. They went as far as to predict that home price growth will stay at an average of 0% in 2023. While potential buyers may see this as positive news because the prices won’t continue to skyrocket, real estate prices are still up a significant amount since the start of the pandemic.

That said, there’s a huge difference between stalling home price growth and real estate prices decreasing. Just because the growth stalls, it doesn’t mean that prices will drop. Some experts feel that home demand will remain strong due to a strong labor market and an inadequate supply. With strong demand for homes, it’s difficult to imagine real estate prices dropping a huge amount any time soon.

How should you be investing?

It can be difficult to decide if you should be investing your money in a confusing real estate market at the moment. Investing in real estate becomes riskier when you factor in high-interest rates and inflated real estate prices. On the one hand, you don’t want to be locked in at an astronomically high rate. On the other hand, you’re not sure if you should keep on waiting longer for prices to drop to pre-pandemic levels or if that’s even possible at this point.

An alternative is investing in real estate through purchasing stocks in companies that correlate to the housing market. Q.ai offers Investment Kits with REITs and other real estate positions built in.

Bottom Line

It’s no longer a seller’s market for the reasons listed in this article, but we’re not quite a buyer’s market yet. The next handful of months will be a transition. There’s a variety of data pointing in various directions, but it’s difficult to state with certainty when real estate prices will drop. Home price growth appears to be slowing down, but the jury is still out on when prices will drop and how far they will go. Federal Reserve Chair Powell might be right, it could be time for a correction in housing.