Real Estate 2022: The Ultimate Guide to the Coming Real Estate Crash

The housing market has long existed at the center of the macroeconomic health of the entire country. Millions of hopeful homebuyers have been scratching their heads as home prices have soared more than 40% since the pandemic began. However, as 2023 approaches, housing is poised for massive change. Mortgage rates are up, while home sales, home construction and demand for mortgages are down. A record number of Americans are looking to sell their homes before the housing market turns cold.

Regarding the Federal Reserve and recent comments by Fed Chairman Jerome Powell, it is clear that the economy has not yet reached the end of the central bank’s hawkish monetary policy. Further interest rate hikes and quantitative tightening are likely imminent, a worrying omen for housing, which has long been considered the most rate-sensitive industry in the country. While the case for a housing downturn remains strong, the case for a broader, more malevolent downturn continues to grow stronger by the day.

Will there be a real estate crash? Will mortgage rates continue to rise? Is there investment potential in a slowing real estate market? What will happen to house prices in a recession?

Depending on who you ask, you may receive extremely diverse responses. Some maintain that a real estate crash is a notion taken out of fiction, a virtual impossibility. Others claim it is only a matter of time.

Here has InvestorPlace, we’ve worked hard to find the answers so many Americans are desperately looking for. Whether you’re looking to take advantage of a potential housing slump or simply trying to avoid losing money when prices drop, we’ve got you covered.

The housing market crash has humble origins

As in the past, rumors usually start in the heat of rampant growth. This time it was no different.

It’s hard to overstate how quickly house prices have risen since the start of the pandemic. Median U.S. home prices soared from $322,000 to $440,000, a jump of almost 40%. Although it is common for the value of real estate to increase over time, a jump of this magnitude is abnormal.

As Covid-19 sent millions of Americans indoors and interest rates fell to historic lows, demand for homes – where most spent the vast majority of their time – naturally increased. . At the same time, home construction and the general supply of housing in the United States fell. Basic economics tells us that this was essentially a recipe for runaway house price growth.

Most troubling for economists is that even though mortgage rates have shot up this year, pushing housing demand down, house prices have continued to rise for most of the summer. This is, in a way, what really sparked fears of a real estate slump as well as comparisons to the crash of 2008.

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Continue reading below for page 3 of our guide to housing accidents

Could a recession trigger a housing downturn?

While some economists still maintain that house prices are unlikely to fall due to housing shortages, this argument is not without stipulations. If the country were to plunge into a broader recession, even many doe-eyed economists agree that housing demand could fall sharply enough to cause a reaction in house prices.

Unfortunately, the case for a broader recession remains more uncertain than ever. According to the historical technical indicator, a recession is defined as at least two consecutive quarters of negative GDP growth. Well, we’re well past that point, and the idea that we’re already in the midst of a recession remains hotly debated. Consumer spending hasn’t taken a dive in a shrinking economy, the US continues to create new jobs, and gasoline prices have come down significantly from their peak.

However, that does not excuse the fact that the country’s economic downturn is far from over. The Fed is still likely to continue raising interest rates and dumping bonds. Both will lead to a further decline in aggregate demand.

The shape of a modern US recession remains unclear. Its effects on housing, however, could be quite significant.

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Continue reading below for page 4 of our guide to housing accidents

Mortgage rates, interest rates and the housing market: what to expect

Mortgage rates are integral to the integrity of U.S. home prices The proof really is in the pudding: As mortgage rates have more than doubled from their pandemic levels, interest in buying of a house almost fell. Mortgage applications are still at one of their lowest levels on record. One in five home sellers even lowered their asking price in August due to the surprisingly cold market. Unfortunately, it doesn’t seem like much help is on the way.

As the cost of borrowing increases in the form of increases in the federal funds rate, mortgage rates will likely continue to rise. Mortgage rates are not directly controlled by the Fed; rather, they react to certain forces, including 10-year Treasury yields. This means that it is possible that even if interest rates increase, mortgage rates will remain stable. However, many economists expect a rise in lending rates to continue to put upward pressure on mortgage lending. And if the past year was any indicator, the increase could be substantial.

The 30-year fixed rate mortgage has been the foundation of the US housing market since time immemorial. Going forward, the trajectory of mortgage rates will likely have significant effects on house prices.

If a housing crash really took hold, lending rates would play a major role in slumping housing demand.

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Continue reading below for page 5 of our guide to housing accidents

Do the experts think a crash is coming?

Top economists and analysts have long been in conflict over the potential for a widespread crash in the housing market. Optimists argue that there simply aren’t enough homes available for sale to really bring prices down. Doomsday theorists believe that house prices are so overvalued that a drop in demand alone may be enough to trigger a cascade of falls in local markets.

The real answer? Probably somewhere in the middle.

The supply of homes for sale has increased this year. Indeed, in July, the United States recorded a supply of new homes of 10.9 months, almost double the level recorded in December, and increasingly close to the record supply of 12.2 months of the housing crisis of 2008. This reflects a runaway increase in housing supply, which just a few months ago would have seemed impossible. That dampens some of the wind of the optimists’ case, but doesn’t exactly mean that a real estate crash is a certainty.

Indeed, even now, many economists and real estate companies maintain that the worst case scenario for housing is far from what many would equate to a crash.

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Continue reading below for page 6 of our guide to housing accidents

How low will house prices fall?

The extent to which the market will flounder is perhaps even more controversial than the notion of a housing downturn itself. Depending on who you ask, house prices will do anything, stagnate, continue to grow at a stunted rate, or plummet.

In this sense, everyone from real estate agents to economists to Wall Street analysts is somewhat in the same boat. The shape of the broader economy will likely prove to be the most influential determinant of the housing market. Although the Fed has touted the economy’s legendary soft landing, only time will tell.

Understanding the different potential outcomes of a low-growth housing market can help avoid investing in a money pit that may well lose some of its value in the months and years to come.

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Continue reading below for page 7 of our housing accident guide

Undervalued and overvalued housing markets

While estimates of a 5% price drop may seem relatively moderate – and don’t get me wrong, compared to the 2008 crash, it is – that doesn’t mean the pullback will be equal across the country. .

Since the start of the pandemic, some regional markets have seen their prices rise even faster than others. That’s pretty hard to do when the average house price is up 40%.

With this, the opposite is also true. There are many undervalued areas where home prices are likely lower than they should be given the current high state of house prices. These locations are also likely to be subject to a less volatile swing should a real estate crash really take hold.

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Continue reading below for page 8 of our housing accident guide

How to take advantage of a potential housing downturn

Although a real estate crash usually causes assets to lose value, there are still ways to profit from a decline in house prices.

Indeed, just like Michael Burry of the big court, opportunities abound for those who expect housing to turn for the worse.

Now, betting against housing is always risky business, simply because house prices, given enough time, will always rise. However, it is possible to get 3x returns on every percentage drop in house prices.

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As of the date of publication, Shrey Dua does not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to publishing guidelines.

With degrees in economics and journalism, Shrey Dua draws on his extensive background in media and reporting to write knowledgeable pieces covering everything from financial regulation and the electric vehicle industry to the housing market and the Monetary Policy. Shrey’s articles have appeared in Morning Brew, Real Clear Markets, Downline Podcast, and more.

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