Real Estate Market Challenges in 2022 and the Future Outlook for Real Estate in America

As the economy transitioned out of extreme situations brought upon by the Covid pandemic, the Federal Reserve printed more “free money” which accomplished their mission of stimulating economic activity. There are two issues with this; nothing is actually free and economic stimulus cannot last forever. This artificial economic stimulus and the natural increase in consumer demand after the pandemiccaused spending to skyrocket and also caused inflationary pressures to increase. The War in Ukraine, and continuous, strict China lockdowns added fuel to the fire and created the perfect storm.

Now, with an extremely difficult situation in front of them, the Federal Reserve is faced with a decision. They know that increasing interest rates is necessary, but by how much and how quickly can they do that without causing serious problems to the economy and society?

How Interest Rates Can Affect The Real Estate Market

As interest rates continue to increase, consumers are forced to face reality. Can they afford to live where they are currently living and continuously spend how much they are spending? For individuals and families that are dependent on credit, the answer is most likely no and the average American is likely to start thinking more about their spending and finances.

If these consumers realize that they need to spend less and save more, then demand will dec犀利士
rease in many parts of the economy, including housing.

Less Americans will be looking to move, or buy a new house, which means less competition in the housing market. Less competition meanshome sales prices will decrease (less people to bid up the price). In other words, a seller’s market will become a buyer’s market in due time.

The craziness of the 2020 and 2021 real estate market has already slowed down withrising interest rates as it becomes more expensive for homebuyers to borrow money to purchase a home.

The Statistics

According to recent data from the National Association of Realtors (NAR),existing single-family home sales are down 19% from July 2021 but the sales price of these homes is still up 10.6% since July of 2021.

The number of homes sold in America in July of 2022 is currently less than the number of homes sold in America in 2019 (4,310,000 vs. 4,765,000).

Something to keep in mind is the month over month change in sales price of single-family homes in America. There has been a consistent increase in these sales prices every month since 2020 with the price only dropping twice from July 2021 to August 2021 and from August 2021 to September 2021. Since September 2021, sales price has steadily increased until July 2022, in which the median sales price of single-family homes dropped from $420,900 to $410,600.

This decrease in the sales price for existing single-family homes should be monitored moving forward since these reports are lagging and we are currently in September of 2022. If August numbers are less than July’s report, then this could confirm the start of a consistent macro downtrend in the price of single-family homes in America.

The Real Estate Market Works in Waves

Real estate is not like an equity on the stock market. It is an illiquid asset, meaning it cannot be bought and sold quickly. This means that home values can be volatile, but they do not change significantly day-to-day. It takes time for significant prices changes to occur and this is shown in the year-over-year changes in home sales and sales price.

The inner workings of real estate supply and demand works in waves. As supply slowly increases, demand is slowly decreasing (prices decrease) and as supply is slowly decreasing, demand slowly increases (prices in犀利士
crease).

Right now, based on statistical data, it can be said that home supply is slowly increasing, while home demand is slowly decreasing, which is good for homebuyers and investors looking to get deals on a new home, but this does not mean it is the perfect time to buy.

What Does This Mean For Homebuyers?

Home prices are still high, but as stated above, the real estate market moves in waves. We are in the middle of a transition to lower home prices but we do not know how far they can decrease and when home prices will stop decreasing, but we can say that based on the data from NAR of increased inventory and the month to month decrease in median sales price of existing single family sales price, we could be slowly moving from a seller’s market to a buyer’s market. This depends on a variety of factors like federal policy, and supply chain issues.

Based on the statistics, it’s clear that prospective homebuyers should be observingthe market closely as it moves with the Federal Reserve interest rate changes, supply and demand changes, and how the market is affected by inflationary pressures.

If the Federal Reserve is successful in decreasing inflation, and home prices consistently drop, then a Federal Reserve pivot would be expected, causing interest rates and mortgage rates to eventually fall again.

If they are unsuccessful, and prices stay too inflated, they may continuously increase rates and depending on how quickly they do this, a real estate pull back could be a viable outcome.

So far, we have seen energy prices decrease, but the percentage of inflation for all other sectors remain high, which means the Federal Reserve will have to continue on their path of increasing rates and QT (quantitative tightening).

It is too early to tell if we will see a “crash” and it is unlikely as the conditions present now are not the same as they were in 2008, but a decrease in home prices in the near future is expected.

Conclusion

Home buyer demand is likely to slow throughout the end of the year, although back-to-school season usually provides for a hotter real estate market.

The world is currently going through strange times and inflation is not only a U.S. problem, but a global concern. As economies throughout the world have grown, each is reliant on the other to maintain balance in the supply chain.

Home prices are still high in America (10.6% increase YOY), interest rates are increasing, and this does not make for an ideal situation for the average home buyerat this moment, but once this transition or wave is over, it could provide some appetizing opportunity for homebuyers that were sidelined during 2020 and 2021.

For any investors or homebuyers that have found ideal investment opportunities, Source Realty Capital has a variety of programs to assist your lending needs. Contact us today to get started!