Midway into 2022, it has become increasingly clear that the real estate market is at a new juncture. Fewer properties are getting multiple offers and bidding wars aren’t as frequent as they were just a few months ago. And, although several markets have yet to cool down, price reductions are also beginning to manifest.
Let’s take a look at some relevant statistics as of July 2022:
- Home sales are down by a significant margin, according to the National Association of Realtors (NAR). Compared to June 2022, existing home sales decreased by 5.9%. The year-on-year difference in sales figures, however, is more drastic with a 20.2% slide.
- New residential sales were at a seasonally adjusted rate of 511,000 – a nearly 30% decline year-over-year, according to a joint announcement by the U.S. Census Bureau and the Department of Housing and Urban Development.
- Closer to home: Sales volume in Los Angeles County fell by 32%, according to the California Association of Realtors. The median sales price this August also decreased by 1.6% from July.
Taking all these into consideration, all the signs seemingly point to a real estate market correction – a phase where buying and selling activity is normalizing from extreme levels and price decreases are slowly but surely spreading throughout the market.
But how sure are we that the real estate market is, indeed, entering this new phase? And, if that is the case, how can buyers and sellers prepare themselves?
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The Tell-Tale Signs of a Real Estate Market Correction
Regulating agencies and industry observers have issued warnings of a major shift in the market since the first quarter of 2022. What are the different market indicators that led these experts to confirm the occurrence of a real estate correction?
- Decrease in home sales
- Decrease in listing prices
- Decrease in mortgage applications
- Increase in number of days on the market
- Increase in housing inventory
- Increase in defaults and foreclosures
- Take advantage of less competition. Buyers who have done all the preparations they need to buy a home shouldn’t wait any longer. Higher mortgage rates and the premium price tag on homes within areas that have yet to adjust have pushed out a good chunk of the competition. In other words, fewer buyers overall will mean more opportunities to snag that dream home. And, as we move further away from the frenzied activity from the last two years, you’ll be less likely to get into a bidding war.
- Manage expectations. For those who are still serious about buying now but are sidelined by the higher costs, it’s important to stay grounded. A house that’s smaller and can be improved over time may be better than a palatial estate that may put you in a shaky financial position. Instead of obsessing over having everything you need, be realistic and see if you can settle with a more modest home that has all the essentials.
- Focus on building financial readiness. It’s too early to say that a market correction will benefit the vast majority of buyers. The changes recently observed won’t make a meaningful impact at the moment. So, for those who have been priced out of the market, focus on being financially ready to buy when the opportunity comes. Strengthen your credit score and continue saving up for a down payment.
- Be extremely wary about adjustable-rate loans. These particular loan types may offer extremely low rates during the initial years but, as the name suggests, these adjust with market trends. With the current market moving into what is seen as a correction mode, rates of these loans are also expected to move toward higher territory and can swing wildly up and down depending on how the market moves. So, here’s a good rule of thumb: if it’s too good to be true, it probably isn’t as good a deal as you hoped it would be.
- Sell now before the market fully adjusts. If you’re planning to sell with less risk, the best time to do it is now. With housing supply still playing catch-up in many areas, some sellers may still be able to take advantage of the tail-end of the pandemic-induced pricing surge which can translate to more ROI in the long run. But more importantly, it’s highly difficult to predict what could happen during a market correction. Better to cash in now than later or in the next year.
- Hold off and prepare for a shifting market. Many sellers are still at an advantage right now but not everyone has the upper hand. Little by little, housing markets are cooling down (like San Jose, Sacramento, and Oakland). It’s becoming increasingly clear that the days of multiple offers are numbered.
- Assess your property portfolio. Those who have created an intensive real estate asset portfolio may need to reassess their assets in lieu of an impending market correction. Depending on risk appetite and business savvy, it may be wise to sell off assets that are in the red, even if this means getting less money back. Revenues from whose sales can greatly benefit better properties that are already generating a steady income stream. Alternatively, the additional capital can also go into smaller, more affordable investments that can potentially yield high returns once market correction subsides.
As indicated earlier, home sales have declined for the sixth straight month as of July 2022. Overall decreases in month-to-month and year-over-year home sales are among the major signs to look out for. The drop in sales can be driven by a variety of reasons, from high mortgage rates and government austerity measures to previously exorbitant home prices.
It’s worth noting that this decline is hitting markets during that part of the annual cycle when home sales typically skyrocket. Spring and summer are usually times of frenetic market activity but this year, the market climate was calmer and more cautious. However, slower market activity doesn’t always mean that a correction is certain.
NAR data shows that the sales price of existing homes fell by $10,000 in July. Although it’s a fairly modest figure, major price corrections in real estate generally take place in a span of several months, not overnight.
Moreover, there are still some areas that have yet to feel the sales dip, especially in places where sellers have yet to reset their prices based on federal government-enforced economic drivers like inflation and interest rates.
With a significant drop in home sales despite the noticeable improvement in the housing supply, home listing prices may follow suit.
Caveat: It’s worth noting that overall home prices are still on the rise. In fact, the median price for homes in July is worth about $40,000 more than its price a year ago.
Buyers are now more hesitant to take out a loan to finance a home purchase – and for good reason. Interest rates have doubled since the start of 2022, rising to as high as 6% after the Federal Reserve raised benchmark rates to fight rising inflation.
According to the Mortgage Bankers Association, in the week ending July 1, mortgage applications for single-family homes decreased by 17% from the same period in 2021. In the week ending August 12, it became 18% lower despite the slight mortgage rate decrease the week before.
Barring any abrupt shift in the market, it’s expected that interest rates will play between 5% and 6% for the remainder of the year.
The length of time that a house for sale remains in the market still seems to be within normal parameters, as reflected in data from Realtor.com. Homes were on the market for a median of 31 days in May (six days faster than the same month in 2021). In June, the median was 32 days.
However, the shorter time span reveals that a growing number of sellers are now aware of changing market conditions and are taking advantage of the current climate to sell just before the market enters into full-on correction mode.
In July, the median days on the market slightly increased again to 35 days. As the market further cools down, experts anticipate this figure to go up, as well. A recent Realtor Confidence Index Survey attests to this, with agents expecting homes to sell longer in the coming months.
Throughout the first two years of the pandemic, a housing shortage gripped the U.S. real estate market and drove up home prices. Now, things seem to be heading in the opposite direction.
Over 1 million homes were left unsold, according to NAR’s data for May 2022. Then in June, the inventory of active listings increased by nearly 2% year-over-year.
While the housing stock is still nowhere near pre-pandemic levels, we are starting to see a steadily growing inventory as more new homes enter the market.
There’s little doubt that the market is indeed shifting, but there is still no wave of defaults and foreclosures sweeping the entire industry.
In light of the major trends mentioned above, some observers and analysts have warned of an impending crisis similar to the Great Recession of 2008. However, it would be a mistake to conflate what happened in 2008 with what’s taking shape in 2022.
Artificial demand, propped up by cheap credit and unethical lending practices, was a crucial factor during that global financial crisis. We see nothing of that right now.
Apart from improved lending standards, high mortgage rates are discouraging buyers with a flimsy financial base from entering the market. And many buyers who have secured lower rates in the past are naturally hesitant to buy a home right now, thus, contributing to diminished home sales.
The Difference Between a Market Correction and a Full-Blown Crash
Although both terms indicate a period of decline in demand, buying activity, and prices, one shouldn’t be used interchangeably with the other.
A real estate correction happens when the home price index (HPI) falls by, at most, 10% from the highest recorded point within a year. This phenomenon is crucial in balancing the market when it veers too strongly toward a particular direction. On the other hand, a real estate crash happens when the HPI falls by 10% to 20% or more.
All in all, there are no convincing indicators that would suggest that the market is going to crash in the near future. Data from the Federal Housing and Finance Agency show that the HPI was up by 1.4% from April to May 2022. Year-on-year, the HPI also grew by 18.3%.
Does a market correction become a market crash?
A market crash is always preceded by a period of correction, but the mere existence of the latter doesn’t automatically guarantee that a crash will happen. There are two rare conditions that must first be fulfilled before a correction transitions into a full-blown crash.
First, a correction must last longer than a couple of months. In this scenario, there is a continual decline from the highest HPI taking place for three months or more. Second, that period decline must amount to a 20% decrease from the most recent market high.
What does a market correction mean for buyers and sellers?
During a real estate market correction, not all buyers will be hesitant to purchase a home and not all sellers may have the upper hand in negotiations. The best path forward will depend on the context and financial position.
For buyers:
For sellers:
For sellers who are finding it hard to get offers despite best efforts, it may be best to hold off on the sale. Current homeowners are in a good position to weather a market correction. Projections indicate that future
home prices are still on an upward trend through 2023, albeit, at a much slower pace.
Why Working with a Realtor is the Best Approach During Economic Uncertainty
It can be difficult to accurately predict the movement of real estate markets in the coming months. But, having access to and a thorough understanding of up-to-date market data can point you toward the general direction where the market is headed so you can better anticipate the onset of an actual housing market correction.
This is where a professional real estate agent comes in. They don’t just provide you with the latest real estate information – they also explain the technical data to help you make sense of what it all means.
Below are a few more ways that a Realtor can be of service to you.
Find out what’s wrong with any particular home
Buyers in a rush to secure a deal may be more prone to overlooking key details about a home. Issues with heating and cooling systems, roof damage, foundation problems, and mold and mildew buildup may not be immediately apparent.
Plus, buying a home anywhere in California will entail going through extensive home disclosures. It can be a daunting task even for an experienced home buyer.
Your agent can help you sniff out the red flags in time, saving you a lot of worry and money. Agents develop impeccable attention to detail and sharp instincts, thanks to their years of experience handling a great variety of properties throughout their career.
Get a better perspective on pricing
Agents have access to the Multiple Listing Service (MLS), a database containing home listings and most recently sold properties. Drawing up-to-date information from this source, your agent can create a comparative market analysis to help you come up with the right price for your home.
And if you’re in the market as a buyer, you can glean information from the MLS to craft a compelling offer. You’ll also be in a better position to know whether or not a listing is overpriced.
Stay objective
A market correction or other periods of economic upheaval can make a real estate transaction even more stressful than it already is. This can make buyers and sellers alike vulnerable to making emotionally driven decisions. But succumbing to that pressure usually results in a lopsided deal or an unfavorable outcome.
Real estate agents act as objective advisers who will help you stay level-headed no matter the circumstance. Although they are obligated to follow their clients’ final decision, duty compels them to offer advice that can serve you better in the long term. They can’t afford to have any emotional stake in the transaction due to their fiduciary duty to help you secure the best deal possible.
Avoid sugarcoating a bad situation
When the going gets tough, as it often does in many real estate transactions, people tend to sugarcoat to help justify a particular course of action.
A significant price discount may seem like a steal even though it’s an attempt to hide major flaws. Or, it may seem reasonable to acquiesce to a seller’s request to cover closing costs that they should be paying.
A trustworthy agent will be honest with you and advise you against entering into a bad deal. They don’t have the luxury of sugarcoating bad situations.
Get in Touch with Martin Feinberg
With over 30 years of experience in assisting buyers and sellers in Westside LA, Martin Feinberg can help you navigate the shifting real estate market. Whether or not a correction is looming, Martin is best equipped to provide you with much-needed insights to assist you in making the best decision.
Let Martin Feinberg help you achieve your real estate goals with ease. To book a private consultation, you may contact him by 310.729.6573 or send an Martin(at)martinfeinberg(dotted)com.