U.S. Housing Market Tumbling Closer to a Collapse
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
The pandemic-induced housing market is swiftly cooling down, as both buyers and sellers are facing growing uncertainty. Indeed, the U.S. housing market is tumbling closer to a collapse – the first in more than a decade.
The once bubbly market was fueled by homebound buyers and record low-interest rates throughout the early months of the pandemic. Realtors and builders were battling to match supply with demand.
Now, at the tail-end of COVID, gloomy market indicators have sent warning signs across the housing industry.
Home sales have plummeted, even as some states have seen slashing prices to help them navigate the topsy-turvy market conditions. July marked a drop of 5.9% in sales compared to June. Despite the decrease in sales, home prices are still at an all-time high, as Q2 saw the average home price close to $440,300.
The tumultuous conditions have left both buyers and sellers uncertain about where they stand.
In a recent note to its clients, investment management firm Goldman Sachs warned that as sales drop, prices tumble, sentiment sinks lower, and rates climb, the housing sector will slow well into 2023 with price growth eventually falling to zero by Q3 next year.
Investors are becoming increasingly uncertain about their direction. Some economists have suggested that real estate investors should pull back before the interest-sensitive bubble completely bottoms out.
But riding out the uncertainty will take a different approach from what investors did back in 2006-2008 during the financial crisis. Financial engineering is a lot different today, and much of the underwriting back then isn't as loose anymore, leading to more investors and buyers taking out fixed mortgage loans.
Some brokers and financial advisors are now encouraging a different strategy to help buyers and sellers better understand where the market is heading in the coming months.
Many advisors refuse to acknowledge the possibility of a looming market recession. Others argue that prices could bottom out, which would only lead to a much worse scenario that’s currently playing out.
The tug and pull between various factors have made it challenging for many to understand how they will approach these bearish conditions.
Rundown on market sentiment
To make for an even more confusing plot, a recent study by OnePoll found that 6 in 10 Americans, or 56% believe that right now is a beneficial time to enter the housing market.
The same study further revealed that 47% of surveyed individuals will be looking or aiming to buy a house within the next year, while 26% are existing homeowners and will be looking to purchase a second or new property. A total of 74% will become first-time buyers.
Despite the Fed’s aggressive interest rate hikes, which have been a key arsenal in its fight against record-high inflation, many Americans are still willing to jump into the frothy housing market.
The average rate on a 30-year fixed mortgage, which accounts for almost 90% of all mortgage applications, has almost doubled since the start of the year. In January, rates were reading a steady 3%; currently, it’s just above 6% according to recent indicators.
Higher mortgage rates would mean that if someone buys a house at $400,000, their monthly repayment would be $700 higher now than what it was back in January.
On the other end of the spectrum, sentiment from homebuilders and construction crews is not looking as bright as many would think. According to The National Association of Home Builders/Wells Fargo Housing Market Index, homebuilder sentiment fell by 6 points to 49 in August. This drop marked the eighth consecutive monthly decline.
Homebuilders are still experiencing high demand in some parts of the country, but overall buyer traffic slowed down overnight.
A combination of the Fed’s tightening monetary policy, the increasing cost of construction and labor shortages have added to the sudden halt in sales.
Navigating turbulent conditions
It’s been an extraordinary time indeed, and for many navigating the market against the backdrop of severe volatility has pushed them further into the woods.
Or has it?
The market isn’t completely dead. There are still some buyers left who are taking their chances. Those that are hanging on have become more creative, looking to explore alternative markets.
In a recent poll by Reuters, analysts predicted that the sinking prices of homes, alongside cooler inflationary conditions, will help stabilize affordability concerns for those buyers and investors sticking in the market.
Things are looking up already, as a recent Fannie Mae survey found that a majority of respondents expect housing prices, and inflation will come down, even as a fair share still believe mortgage rates will keep climbing over the next 12 months.
Yet, overall sentiment remains bearish among most major housing markets across the country, and those who are shielding themselves against a possible market recession are reluctant to return within the coming year.
Finding a balance
It’s difficult to find the perfect balance between what to expect and how to strategize going forward.
For those who bought a house to live in during the market boom, advisors have found that it’s easier and safer to wait it out before they jump back in to sell.
On the other hand, buyers who entered the housing market in the hopes of snatching up property as an investment might start to see values erode. In this case, clients won’t lose until they start selling, even if prices keep coming down at the pace they’re currently falling.
Advisors are finding it better and safer to tell clients to be defensive about their choices. Another strategy that many have rather taken up is to advise clients to invest their cash in other assets before buying property.
The wealth isn’t disappearing, it’s simply moving to a different bucket.
It’s a risky scenario, and for many, it could lead to further portfolio erosion if a more substantial strategy isn’t considered.
A few different scenarios may play out in the coming months that would help buyers and sellers get the prices they’re looking for.
For one, a complete market bottom could mean that price growth could be near zero, giving some an opportunity to move their stakes out of the property market and into other investments.
Macroeconomic conditions could deteriorate to the point where the Fed’s forced to bring down rates to stimulate economic activity.
The latter is a bit unlikely, and we might see the market experiencing risky volatile conditions for the next couple of months, at least until recessionary fears have passed.
Consider the broader aspects alongside a manageable strategy. A housing market downturn is nothing new. But it still requires exceptional insight and observations to profit in real estate.
Thomas Young is running for Utah State House District 40. Outside of politics, he is an economist who builds models, researches the economy, advises on public policy, speaks at conferences, and enjoys thought leadership.