The Real Estate Update No One Wants You to See The housing market correction has begun, with more big price cuts coming. But are these price cuts uniform across all price ranges and cities? Well, in this article, I will be covering the following: Price reductions, are they going to get worse? Are mortgage rates going to continue to rise? Do we already have too many homes for sale? What cities are likely to experience huge price decreases? June housing numbers came out and shocked the markets and home prices across the U.S. We saw the largest single-month drop in over 50 years, falling on average a little over 2% in a month (annualized at 25%). However, this is to be expected since from May 1st to June 10th, mortgage rates jumped from 4.375% to 6.125%, the largest rise in U.S. history. This move changed the principal and interest payment on a $500,000 loan from $2500/mo to $3100/mo in just 30 days. Think about that.. that is an over 20% increase in a housing payment in just 40 days! Now that 2% monthly drop is misleading for a few reasons. The first being sellers in the month of May were still being very stubborn by refusing to recognize that you could no longer price your home higher than homes that sold just two months prior. As new homes were listed by realtors, sellers refused to list their home for 5% less than a recently closed model match, which is where the true market was. They rather choose to list their home at top dollar only to have to drop their price 10 days after listing the home to the true market price. This caused the % of homes with price drops to be greatly over exaggerated. This is something we see for a few months as a market is shifting, as sellers take a little while to realize "their" home isn't special. Lastly, a large number of price drops were related to builders lowering their prices on homes that are coming soon as they shifted their pricing strategies in the changing market. As builders typically list their homes for sale several months before the home is available for delivery. We saw thousands of new construction homes that are yet to be delivered to the market slash their prices by 5% to 10%. As home sellers and realtors continue to wake up and realize that you need to price the home competitively in this market, we will see fewer and fewer price drops. 70% of all homes that had a price drop went into escrow within 30 days of the price drop. So, the market is telling us if you price the home correctly, it will sell as the market shifts toward buyers being in control. The Federal Reserve announced last week they would be hiking the Federal Funds rate by .75% for the second time in just as many months. However, on this news, mortgage rates dropped by about .375% over the last week. Why? Well, mortgage rates are not controlled directly by the Fed but are affected by inflation to a much greater extent. It was Jerome Powell's comments in the press conference after the Fed meeting that gave both the stock markets and mortgage markets the relief they were looking for. Chairman Powell stated that they knew the economy was slowing and that further rate hikes would be data-driven. However, yesterday three other Fed members came out and backtracked on Jerome's comments stating that further rate hikes would be occurring until inflation was down to their 2 to 2.5% target (currently at 9.1%). On Tuesday of this week, this spooked the markets, causing both the stock market to sell off and mortgage rates to jump nearly .5% in a day. As I have stated before, I expect the Fed to hike rates three more times this year, getting our Fed Funds rate to around 3.5%, from its current 2.5% rate. It is important to note that any American should be rooted the Fed on to hike the Fed Funds rate that as that rate continues to rise, it will decrease inflation therefore bringing down consumer prices and mortgage rates in the following months. In my opinion, mortgage rates will continue to range between 5%-5.75% for the remainder of the year on a conventional primary home purchase with good credit. I also believe that FHA and VA rates will trade between 4.00%-4.75% through early 2023. I expect all mortgage rates to begin to fall in the 2nd half of 2023 and think we will be about 1% lower for mortgage rates by next fall. We need to maintain high rates to put downward pressure on home prices and the prices of everyday goods. Remember, the Fed wants to put us into a recession to curb demand and get inflation under control! Homes for sale in the United States have continued to increase at a rapid pace. In March of 2022, there were only 240,000 single-family homes for sale in the United States, down from over 1,100,000 in January 2020. This number has increased by 125% in just 5 months, putting us at approximately 538,000 single-family homes for sale as of the first week of August 2022. A balanced market is around 1,000,000 homes for sale, so we are about 55% of the way there. Housing inventory is skyrocketing, but it is NOT due to a massive increase in listings. Sellers listing their homes for sale is only up about 10% year or year. However, inventory is up nearly 100%. How could this be?? Well, it is simple if you have 20 homes listed for sale and 30 people that want to buy those homes, they all get taken off the market immediately with people still left wanting a home. Well, if you now have 22 homes listed for sale and 30 people that want to buy those homes, but only 8 can afford them, well, you have 14 homes left still for sale at the end of the month. Then the next month you have those 14 homes plus 22 more homes for sale, and the story continues. A very different story compared to 2008 when the listing was increasing at a rate of 30% month over a month many times over. Our market is having an affordability increase, not a desire or demand problem. So when rates drop and home prices soften will see more people qualify. Top 20 Pandemic Homebuying Hotspots That Could Get Hit Hard Popular migration destinations during the pandemic will likely get hit the hardest. These markets saw 60 to 80% price increases in just 24 months. As thousands migrated to these cities, we saw insane bidding wars where homebuyers sold their expensive homes in California, New York, or Chicago and moved to cheaper markets like Phoenix, Boise, Tampa, and Riverside. With this migration coming to a halt and mortgage rates in the mid-5%, these markets are my picks for markets that could see 20% to 30% price drops from peak prices. All these markets experience heavy domestic migration, and many have a very high share of second home purchases. Now, this doesn't mean you should not purchase in these markets. I personally am going to watch all these markets heavily over the next 6 to 12 months and look to pick up some bargains. As I think I could get homes in Boise that sold for $700k in March 2022 for $550k by mid-2023. Homeowners are sitting on a mountain of equity, and even in a worst-case scenario, home values drop by 25% before rates drop, you would have less than 12% of all mortgage properties with no equity. Boise, ID Lake Havasu AZ Cape Coral, FL North Port, FL Las Vegas, NV Sacramento, CA Tuscon, AZ San Francisco CA Seattle WA San Jose CA Big Bear Lake, CA Riverside, CA Moreno Valley, CA Bakersfield, CA Jacksonville, FL Knoxville, TN Nashville, TN Fresno, CA Salt Lake City, UT Provo, UT In summary, here are my expectations for the remainder of the year. If you found value in this blog please share it with a friend or family member, as I am very busy running 3 separate companies, but feel compelled to put this together since the news does such a poor job educating my fellow Americans. Fed will continue to hike rates through the end of 2022 Mortgage rates will trade up and down within .5% of where they are now Markets like Ohio, Pennsylvania, Massachusetts, Missouri, New York, Illinois, Indiana, Kentucky, Maryland, and Virginia will continue to perform very well due to much slower price growth over the last two years. I will be looking at picking up Airbnb’s over the next 6 months as many investors look to cash out equity as their savings accounts and main jobs are affected. Especially in markets like Texas, Florida, Alabama, Georgia, Ohio, Arizona, and Nevada Home prices will continue to soften and if a homebuyer is patient they will be able to find amazing deals on homes 10% below market over the next 6 months Mortgage rates will begin to fall in the Spring of 2023 Unemployment will begin to rise in the Fall The US will officially be declared to be in a recession before Christmas, even though we are CURRENTLY already in one. If you are looking at getting pre-approved to purchase your first investment property, pull some equity out of your current home, or getting ready to buy a new home in the next 6 months, just click the link below to get some more information. We are currently licensed in 10 States with 6 more coming this month! If you’re interested in purchasing a home, financing a second home, a short-term rental, or Airbnb, please click the link below to start your journey today! Get A Free Analysis
