Real Estate Market “Breaking Down:” Expert

Real Estate Market “Breaking Down:” Expert

Experts in the real estate market are seeing multiple signals that the industry is beginning to weaken and could see a downturn soon.

Chris Vermeulen, chief strategist of The Technical Traders, warns that various indicators point to trouble ahead for the housing market. He notes stagnant construction starts for both single-family and multi-family residential real estate, a pattern similar to the one before the 2008 recession. Vermeulen stated, “To me, this is a sign that things are really breaking down, and this is just a bounce,” referring to a temporary investment surge that is preventing a complete fall in construction. He also mentioned, “Material and labor costs are up, and then we see the financial sector and real estate pricing really fall apart.

From January 2022 to June 2024 mortgage rates rose from 3.22 percent to 6.87 percent, one of the fastest increases in US history.

Further complicating the industry is the $900 billion of commercial real estate debt maturing this year; commercial investors tend to finance with debt that has shorter terms than residential loans and large balloon payments at the end of the term, and this debt is commonly refinanced. The rapidness with which interest rates have risen has likely caught many commercial investors off-guard, which may cause their deals to become unprofitable after factoring in the higher interest rates.

An additional challenge will be accessing the capital in the first place, as many banks are shying away from lending for commercial real estate.

Vermeulen added that in this unique financial environment, commercial real estate foreclosures have jumped 117 percent year over year in the first quarter of 2024. He also explained: “People don’t realize real estate is primed and ready for another major leg down. They’re buying right now, but the reality is that I think we’re going to see this collapse.”

While prices have not crashed, mortgage applications for residential real estate are at the lowest level since 1995, likely due in part to higher interest rates.

Inventory of homes for sale have been rising since 2021, but are still below levels that preceded the housing market crash in 2008.

Redfin data suggests that recently in certain markets homes are beginning to sell for less than listing price.

According to the highly respected University of Michigan, “Buying Conditions for Houses” survey85 percent of respondents said it was a bad time to buy a house in May, the highest mark since the survey began recording data in 1956.