In a shifting real estate market, the guidance and expertise that Inman imparts are never more valuable. Whether at our events, or with our daily news coverage and how-to journalism, we’re here to help you build your business, adopt the right tools — and make money. Join us in person in Las Vegas at Connect, and utilize your Select subscription for all the information you need to make the right decisions. When the waters get choppy, trust Inman to help you navigate.
No doubt, the real estate industry is one of the most lucrative industries in the world today. Many have invested and become millionaires, some billionaires. Because of this, many are still looking to peer into it despite it being a widely explored investment area.
Interestingly, in 2022, it seems the ever-lucrative real estate market is shifting, and it is not all good news in the real estate space for the first time in a decade. What shift is happening? Will the real estate market still be as fitting to invest in?
The real estate market today and how it is shifting
In 2022, the real estate market is experiencing surges in interest rates, inflation issues and protracted housing supply issues — all affecting the buying, selling and renting out of housing properties. These issues are so serious that in Gallup’s annual Economy and Personal Finance Poll, conducted in April 2022, 69 percent of respondents said that it is not a lucrative idea to buy a house in this period.
This is the first time a majority of Americans have given a negative real estate report in Gallup’s 44-year history. Mortgage rates and inventory are slowing down, housing stocks in crypto are plummeting, and it seems like there is a turn in the market. In a recent report by Redfin, about 15 percent of home sellers cut their asking price in April, up from 9 percent a year ago. All of these are serious signs pointing to a shift towards deceleration in the real estate market.
Interestingly, despite all these negative shifts, prices of housing properties are still hitting new records each week. Is the marketing shifting negatively? As a real estate agent, should you be worried? Brokers, investors, traders and all real estate stakeholders, what is your fate?
Surging mortgage rates
The outside world might make it seem that the surges in mortgage rates that the market is experiencing in this period are something never seen before. Well, this is just an overstatement. The mortgage chart shows that the recent spike is still a fair call, but real estate experts suggest that this might only be the beginning.
The inventory record of the real estate industry over the last two years has been near absent, and this has created a backlog for property buyers. Even as mortgage rates price out some of the intending buyers, a considerable number of buyers are still waiting due to the high financial potential housing properties possess.
Housing economists believe that it will take time to work through the increasing demands, but once we do, there is a chance that the market will cool even further.
To back these reports and opinions up, Devyn Bachman, Vice President of research at John Burns Real Estate Consulting says, “We know the system is log-jammed, but we don’t know how far back the logjam goes. In my opinion, it will take a couple of months for all this to shake out.”
To work through this backlog, the prices of housing properties might continue to surge in the short term — this is exactly what we are experiencing in 2022. But, peculiarities and market behavior shows that these issues are just short-term as a clear of the backlog will sort it all out.
Mortgage payment-to-income ratio
The economic strain sparked by the surge in mortgage rates also increases the chances that the housing industry could experience a protracted backlog or even move into serious price correction. During the COVID-19 pandemic, the housing market experienced a boom.
In this period, unprecedented low-interest mortgages protected homebuyers to an obvious extent even as home prices experienced a 34.5 percent spike over the past two years. Now, mortgage prices are back up and buyers are forced to take the heat. A Black Knight report explains the situation this way: “In December 2021, a regular American household would have to spend 24 percent of its monthly income to make a mortgage payment on the average-priced U.S. housing property.
As of May 2022, Black Knight’s mortgage-payment-to-income is now up 34 percent (highest since 2006). So, are we experiencing a repeat of what happened in 2006, or even worse? Maybe, maybe not.
Economist Mark Zandi expects some of the most overpriced regional housing markets in the U.S. to overheat and see price drops between 5 percent to 10 percent in the coming years.
What is to come?
With the shifting patterns in the real estate market, what can we expect this summer, 2023, 2024 and beyond?
With regards to buying, real estate CEOs, analysts and stakeholders alike say that though mortgage interest rates are high, and the inventory is choked up, it is only a matter of time before everything stabilizes. Nick Bailey, CEO of RE/MAX, says that buyers being kicked out by the rising rates means that “it’s going to cool the competitive landscape a bit, and prices are stabilizing.”
With regards to selling, though everything may look bleak now and unfavorable to a real estate investor, it does not necessarily mean investors are losing money to poor sales of properties. Market analyses show that prices of property will continue to rise, but it might just be at a slower pace than before. Furthermore, since there are fewer homes for sale, the available ones will be sold at profitable, high prices.
The current shifting in the real estate space is also likely to have an effect on the renting out of properties and the construction of new ones. Though Zumper recently released a report in May stating that the National Rent Index has hit an all-time low with one-bedroom apartments up 0.3 percent year over year and the two-bedroom counterparts up 0.7 percent, the report analysis suggests that the lows are only short-term due to the spiked housing rates and that sooner or later everything will start to normalize.
With the constriction of new properties, we can expect a slowing down. Due to low demand, many properties will take time to complete. Mark Fleming, Chief Economist, First American Financial Corporation says that “they’re building houses at a pretty fair clip; the problem is they can’t get them finished.”
Conclusion
With the negative shift ravaging the real estate market, it is easy to say that there is no positive to take out of it. But as with every market, there are opportunities. Expert opinion and market behavior all point to the fact that there will be a retracement, though it may take time. Notwithstanding, the real estate market is still yielding good profits for investors and stakeholders alike.
Chris Heller is a best-selling author and currently serves as the Chief Real Estate Officer at Ojo Labs. He also serves as an Advisor and Head of the Editorial Board for AgentAdvice.com. Connect with him on Facebook and LinkedIn.
