Here’s How You Will Be Affected By The Housing Correction The housing correction favors no one, but some will be hurt more than others.

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The rapid price boom many housing markets experienced during the pandemic is slowing down, and many economists expect a housing market correction. The good news is that the housing market isn’t expected to crash. The bad news is that the housing market is entering a new era that isn’t likely to benefit anyone specific.

Homes listed in 2023 may stay on the market longer, and sellers may not realize the same profits they could have six months ago. Meanwhile, even if buyers can snag a lower price on a home in some markets, high interest rates are hurting affordability. Agents are already hurting from the slowdown in selling activity, and investors will need to adapt to new conditions that are making some investment strategies impractical. No one wins. However, everyone can be mindful of housing forecasts and adjust their plans to capture the best possible outcomes in a difficult situation. 

The Impact on Sellers

The Market Is Already Shifting

Sellers may be aware that listing now will mean a longer process and higher mortgage payments on a new home, but people still need to move. Inventory has begun increasing, leading to less competition, although inventory is still tight relative to pre-pandemic levels. The sale-to-list price ratio is dropping as well—gone are the days of multiple offers above-asking. And the median number of days a home stays on the market has been increasing since June. While trends in individual markets vary, many are shifting into the hands of the buyer. 

Sellers Are Still Poised to Earn Profits

Existing home prices skyrocketed during the pandemic. Between December 2019 and June 2022, home prices rose 45%, the biggest jump since the U.S. national home price index was developed. The markets that saw the most rapid increases are slowing down the fastest, but even the most dire housing forecasts predict a drop of up to 30% in the most overvalued markets—not enough to wipe away the equity gains most homeowners experienced, though some individuals could lose money to bad timing. 

Some families could stand to earn up to $1 million in untaxed capital gains if the More Homes on the Market Act, which the National Association of Realtors endorses, passes. The legislation would double the threshold for the capital gains exclusion, which is now $250,000 for single filers and $500,000 for married couples. The law may encourage previously hesitant homeowners to downsize, the NAR says. 

But it’s a difficult time for growing families to move to a larger home. Sellers who bought their homes during the homebuying boom, when interest rates were low, may face unaffordable mortgage payments if they try to trade up. The monthly payment on a 30-year fixed mortgage for a median-priced home has more than doubled since the second quarter of 2020, based on new mortgage rates and elevated prices. 

Timing Is Everything

A variety of firms, including Morgan Stanley, Moody’s Analytics, and Capital Economics, have revised their 2023 housing forecasts to predict even steeper drops than they originally estimated. The most optimistic experts only expect a modest increase in prices—for example, NAR Chief Economist Lawrence Yun says prices could rise 1% across all markets next year. The timing of falling prices and housing market recovery is still unpredictable. Yet, it could make the difference between meager profits and huge capital gains for sellers. 

Selling now means facing less affordable payments on a new home. But waiting until late 2023 could leave sellers in a worse situation—mortgage rates might stay elevated, while housing prices could drop. Holding out until late 2025 or 2026 is likely the best option, especially for sellers with fixed-rate mortgages, since most experts expect the market to rebound by then. But not everyone will have the option of waiting. 

The Impact on Buyers

Affordability Pressure in Today’s Market

Prospective homebuyers face several challenges in today’s market. Thanks to inflation, incomes are stretched thin. Prices at the grocery store and rents that are expected to continue to climb through 2023 are making it difficult for people to save. The median-priced home, which is now $454,900, has become out of reach for median-income households. Mortgage rates have come down slightly but are unlikely to drop further and may even go up since the Fed’s fight to tame inflation is ongoing. At current rates, the mortgage payments on a median-priced home would eat up 38% of a median-income household’s monthly earnings. 

A Housing Correction Could Provide Limited Relief

If prices fall as many economists expect, buyers may be able to capture better deals in 2023 or 2024 and realize appreciation gains in 2025 or 2026. But predictions aren’t exact, and experts disagree on when prices will hit bottom. And it’s difficult to determine when mortgage rates will come down. Inflation has been stubborn to the Fed’s efforts. 

Even with moderate price relief, affordability will remain a problem for prospective homebuyers. In order for mortgage payments to return to 18% of household income, which has been typical for homebuyers historically, prices would have to drop 39%, The Washington Post reports. That’s a larger price correction than anyone is expecting. 

Financing Strategies Are Evolving

In 2021, applying for a traditional 30-year fixed-rate mortgage was a no-brainer. Buyers could benefit from historically low rates. Now, a traditional mortgage means getting locked into a higher interest rate. Now that buyers are counting on refinancing once interest rates come down, they’re pursuing financing strategies they may have been deemed too risky in the past. 

For example, adjustable-rate mortgages are becoming more popular, even though they come with unpredictable monthly payments once the fixed-rate period ends. That uncertainty may have deterred mortgage applicants in the past, but ARMs made up 12.8% of home loan applications as of the second week in October, up from only 3.1% at the start of the year. ARM rates haven’t risen quite as much as fixed mortgage rates, allowing homebuyers to access lower monthly mortgage payments, at least during the fixed-interest phase of the loan. 

There may also be opportunities for buyers to use other creative financing options that might not have made sense or been available in a different market. For example, sellers may be willing to offer owner financing, which may be more accessible to low-income buyers with a low down payment or those with poor credit. With owner or seller financing, the seller becomes the lender, holding onto the deed until the buyer has paid for the home with interest. Seller financing can be risky because it’s not subject to the same consumer protections as a traditional mortgage, but it can often result in more flexible terms and cost savings over time. 

The Impact on Agents

Not Enough Business

In 2021, over 47 million Americans left their jobs voluntarily. Many felt trapped in low-paying jobs without opportunities for advancement. It’s now being called The Great Resignation, and while stimulus checks during the pandemic may have been a motivating factor for people to find new careers, some experts say the trend has been ongoing for a decade. People are seeking better ways to live and make money in jobs that provide better pay and more flexibility. That trend collided with high demand in the housing industry, causing more people to become real estate agents. 

The number of U.S. real estate agents peaked in 2021, and now there isn’t enough business to go around. Selling activity is down almost 30%. Agents have gone from fielding too many phone calls from prospective clients to knocking on the doors of homeowners facing foreclosure, hoping to acquire new listings and earn commissions. 

Differentiating and Expanding to Survive

Widespread layoffs in the housing industry and decreased selling activity have led many real estate agents to pursue side hustles until selling activity rebounds. Those who hope to stay in the game will need to adapt. More competition among agents requires more aggressive marketing strategies, including social media marketing. Real estate agents may also need to expand the area or price point they work in or even move to a new market altogether where there’s more demand. Real estate consulting work may be an option for some, while others with less experience may drop out of the industry entirely. Agents can also take advantage of our Featured Agent program for consistent investor leads!

The Impact on Investors

Cash Is King

High mortgage rates are squeezing the margins of investment deals for investors who rely on financing. If interest rates were still at 3.25%, investors would be able to get nearly 40% more cash flow on a median-priced rental property that achieves the 1% rule—one that can capture 1% of the purchase price in monthly rent. High mortgage rates leave less room for vacancy problems, maintenance issues, and other things that can go wrong with an investment property. Unless investors have the reserves to buy properties in cash, they’ll be looking at a narrower segment of properties that can achieve the return they’re looking for. 

The Right Timing Can Maximize Your Returns

As with any investment, it’s best to buy property when prices are at their lowest and sell when prices are high. Home values in 2023 aren’t predictable but are likely to fall, reaching a bottom in 2024 or 2025. Sometimes, investors can use the expectation of lower prices to their advantage. With buyer competition waning, homes are sitting on the market longer. It’s no longer unreasonable to offer a price below asking, especially in markets where price cuts are common. 

However, the uncertainty of future home values also makes certain investment strategies risky. A successful fix-and-flip deal requires a quick renovation. But the real estate market is already losing steam. Investors who acquire a fixer property now could bFe looking at lower home values when they try to resell in a few months. 

Choosing the Right Strategy Is More Important than Ever

Real estate is still a great investment, but certain strategies are becoming less viable. It’s becoming cheaper to rent than buy in most markets, which makes it difficult for investors to get positive cash flow from a long-term rental. Just as agents need to adapt by looking at other markets, investors may need to pursue long-distance investing if they’re hoping for the stability of a long-term rental. 

Meanwhile, the short-term rental market is becoming saturated. In 2021, the demand for Airbnb rentals was high, encouraging investors to enter the market as hosts. The number of available rentals on the platform surged 23.2% over the course of the year ending in September 2022. Now, there’s a massive oversupply of Airbnb properties relative to consumer demand, causing occupancy rates to fall. 

But a rising number of digital nomads may create demand for medium-term rentals in some markets. With a medium-term rental, the investor furnishes the property, pays the utilities, and rents out the unit for one to six months at a time. The medium-term rental is the Goldilocks of real estate investment strategies—it offers greater stability than a short-term rental and higher cash flow potential than a long-term rental. However, it only works in the right market. A hot urban area that is also home to employers that use traveling professionals will likely provide the most opportunities for investors. 

Everyone Must Adapt

To get the best outcomes from your real estate transaction, you’ll need to pay attention to the changing market and adapt accordingly. That’s true for buyers, sellers, agents, and investors. With the right strategy and some patience, anyone can weather the predicted housing correction—there may even be opportunities to profit from it. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.