Will There Be A Housing Market Correction?
It’s a fact that the US real estate market, with minor hiccups, has been experiencing an extended boom over the past decade. Home prices were soaring, the demand was imposing, and low mortgage rates facilitated numerous transactions. However, around mid-2022, the thriving American housing market suddenly slowed down drastically. People could no longer afford to purchase or invest in real estate like they once did. Many started wondering: are we close to a market correction?
Let’s dive deep into the possibility of a real estate market correction in the US!
A real estate market correction is a complex issue caused by several (primarily economic and financial) factors that put an end to soaring property prices. Interest rates, mortgage credit availability, inflation, consumers’ purchasing power, and fears of a recession are the most notable features setting a housing market correction in motion.
In other words, there are numerous moving parts to determine with certainty whether the US housing market will end up in a recession or correction. Some of the revealing signs are already present, indicating that the process has commenced to a certain degree.
The obvious question arises, “Should market correction concern you?” Work with professional local realtors (who know all about ongoing market trends in 2023). Then, market corrections won’t affect you to the same degree.
Rising interest rates
Interest rates and the affordability of homes go hand in hand. As interest rates increase, mortgage costs go up, making homeownership less appealing for many new buyers. Financing a home in 2023 became an unpredictably tricky task. Why? Because the US Federal Reserve has indicated plans to hike interest rates to beat inflation at various times throughout the year. Therefore, you can’t really plan in the long run.
Suppose these rates climb substantially. In that case, potential buyers and investors will avoid entering the market. It's safe to assume that rising interest and mortgage rates will affect home prices. On a side note, owners will find applying for home improvement loans difficult, so they will likely delay upgrading their homes. As a result, a slowdown in demand might ensue, leading to a correction in housing prices.
Surging housing inventory
Any reasonable housing market strives to maintain a healthy balance between supply and demand. However, since the Covid-19 pandemic, there has been a troubling discrepancy in housing inventory across several regions in the States.
New constructions and homeowners eager to benefit from high property prices can lead to an overabundance of available properties. In a buyer’s market, sellers will compete for buyers. Undoubtedly, this will lower home prices, and consequently, a market correction will happen.
How did real estate prices climb so high?
At the same time, various US regions suffer from housing shortages due to the scarcity of building materials and workforce. This phenomenon contributed to high (already built) property prices which now can’t be sold. In such a condition, home sellers have two options. Either they wait till they find a buyer willing to meet their demands. Or, they give into the housing market correction “pressure” and go below the initial price.
Which factors postpone real estate market corrections?
According to Redfin, a sustained increase in mortgage applications is unlikely in the near future. 91 percent of borrowers benefitted from mortgage rates below six percent, and around 82 percent of homeowners enjoy rates below five percent. So chances are slim that they (primarily millennials) are willing to sell and buy a new home (for a presumably higher mortgage rate.)
In addition, for Gen-Z, renting became part of the American Dream. Or, they prefer alternative housing options to be bogged down with “traditional” homeownership.
Final thoughts
If you’re an ambitious investor, we recommend you prepare to answer the following question: does a potential housing market correction mean an opportunity or a problem for you?
So far, the US economy has suffered from inactive wage growth, rising interest rates, declining affordability, and an increasing housing shortage. Simultaneously, investors have their role in the housing crisis and don’t rush in to save the day. To top it all, shifting buyer behavior is a clear-cut indicator we should monitor.
Predicting the exact timing and size of a correction is tough. Still, recognizing these signs can help buyers, sellers, and investors make informed decisions.
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