Why Correction Not Crash

[Peter Cogliano]

Why Correction Not Crash

There have been a lot of talks on whether or not the housing market is primed for a correction or crash. This is my opinion as to why I believe we will see a correction not a crash.

I think it is fair to say that in this environment of hyperinflation and rising rates that the cost of buying a property seems almost insurmountable to the everyday consumer, putting affordability at the top of everyone’s list of concerns. However, I don’t see it so much as one sided issue. In my opinion the US is not only facing an affordability crisis but also an accessibility crisis. In June of 2021 the WSJ reported that according to the National Association of Realtors, the U.S. is short 5.5 million units. This has only been further perpetuated by the lack of new construction that is being bottlenecked due to not only supply chain issues but the cost of building. According to the Nation Builders Association of America the cost of building has gone up 19.2% YoY making it very difficult for developers to meet their margins, therefore disincentivizing development. Not to mention most builders are using some sort of variable financing which is subject to the rising rates, squeezing developers everywhere.

Current property owners have gained massive amounts of equity in the past of years which has deterred homeowners from putting their property on the market. As indicated by the Redfin data, number of new listings is down 19% YoY. Granted we have seen inventory skyrocket in some markets, but this is largely due to the decrease in demand as a result of rising interest rates. Right now, if a homeowner were to sell their home not only would they be paying more for an identical property, but their monthly payment would also increase over 40% due to the rise in rates

The unfortunate truth is that the housing market is stuck between a rock and a hard place. There are two primary levers putting pressure on the market. First being the increase in rates which is applying downwards pressure on housing prices. The second lever is a mixed bag of inflation and low supply which puts upwards pressure on home prices. Despite some buyers being removed from the market it does not solve the historical supply issue due to my prementioned reasons. In addition, millennials are starting to become of age in which they are looking to buy and where this is the largest generation since baby boomers means that demand will stay high relative to the norm. My contention is that you will see 7-9% drop in property prices through the end of 2023 which is far removed from the 27% drop that was experienced in 2008. #data #trends #marketupdate #REI #multifamily