The current state of the nation’s housing market can be described as a correction rather than a crash. While sales have declined and mortgage rates have increased, home prices are still on the rise due to a scarcity of available homes for sale. In contrast, commercial real estate values, especially for office spaces, have been steadily dropping over the past year and a half. It is anticipated that it will take anywhere from two to nine years for building and warehouse values to return to their 2022 levels. As a result, banks that hold real estate debt may face some risks, and it is estimated that around 311 banks are likely to fail in the near future. Despite this, it is not enough to cause a significant disruption to the banking system.
These conclusions were drawn from the insights shared by numerous economists and analysts at a recent gathering of real estate journalists in Las Vegas. Selma Hepp, the Chief Economist of CoreLogic, expressed confidence that there will not be any declines in home prices on a year-over-year basis across the nation. Instead, the market is expected to revert to long-term trends in terms of home price appreciation. Hepp predicted that home prices will increase by 4% from the previous year in 2023.
The National Association of Realtors, however, has a more conservative outlook, projecting a 1.8% increase in prices for this year and a 2.8% increase for next year. While rising prices may benefit home sellers, it poses challenges for buyers who are already struggling with unaffordable home values and higher mortgage payments. According to Zillow’s Chief Economist, Skylar Olsen, the average U.S. homebuyer now needs to spend nearly 38% of their income on house payments. This is a significant increase from the 27.1% reported in December.
The situation is particularly dire in the Los Angeles-Orange County region, where the typical sale would consume 84% of an average income, up from 61% at the end of last year. As a result, home sales have remained depressed both nationally and in Southern California, creating a chaotic environment for industry players such as real estate brokers. Figures from Realtor indicate that existing home sales were down 23% nationwide and nearly 38% in the L.A. metro area as of April.
Economists at the conference generally anticipate an improvement in the housing market for sellers due to a limited supply of new listings and easing mortgage rates. According to Joel Kan, the Deputy Chief Economist for the Mortgage Bankers Association, rates for the 30-year fixed home loan are predicted to decrease from an average of 6.4% this year to 5.6% by the end of the year, remaining in the low 5% range throughout 2024. This shift is expected to alleviate some of the challenges faced by buyers, who are adapting to higher mortgage rates and the need to purchase lower-priced homes.
Despite the positive market outlook for sellers, the scarcity of listings continues to be a problem, as it has reached a four-year low. Many homeowners with existing mortgages are reluctant to sell due to the low mortgage rates they have locked in. In fact, 97% of U.S. mortgage debt is currently at 6% or lower, with 80% below 4% and 41% below 3%. This “locked-in” effect is more pronounced in California, where tax considerations and capital gains taxes create a disincentive to sell.
Nevertheless, sellers are benefiting from an increase in the number of offers they receive. Jessica Lautz, the Deputy Chief Economist for the National Association of Realtors, reports that sellers now receive an average of 3.1 offers per home, compared to the previous average of 2.4 offers. Additionally, American homeowners are sitting on a significant amount of untapped equity, thanks to the surge in home prices during the pandemic. In the first quarter of this year, the average U.S. homeowner with a mortgage had over $274,000 in equity, according to CoreLogic. This excess equity has resulted in more sales without the need for a mortgage, with 28% of buyers paying cash for their homes in May.
Foreclosures are also expected to remain contained due to the substantial amount of equity homeowners currently possess. Odeta Kushi, the Deputy Chief Economist for First American Financial Corp., does not anticipate a repeat of the magnitude of foreclosures seen during and after the Great Recession. She attributes this to the significant amount of equity homeowners now have.
In the commercial real estate sector, rising interest rates have led to declines in property values across all sectors. Industrial property values have fallen by 16% in the past 18 months, while retail and apartment values have dropped by 17% and 22% respectively. Office spaces have seen the largest decline, with values dropping by 34% and vacancy rates at a 30-year high. However, CBRE Global Chief Economist Richard Barkham notes that 80% of the increase in office vacancies is concentrated in just 10% of the buildings. These buildings are typically smaller structures built between 1980 and 2009, located in downtown areas or weaker submarkets with high crime rates and limited amenities. Despite the increase in remote work, office spaces are still deemed important for maintaining a corporate culture and training new employees, with 77% of companies committed to maintaining an office.
In conclusion, the housing market is experiencing a correction rather than a crash, with rising home prices due to a scarcity of available homes for sale. However, commercial real estate values, particularly for office spaces, have been steadily declining. Banks holding real estate debt may face some risks, and it is expected that around 311 banks may fail in the near future. Despite challenges faced by buyers, economists anticipate an improvement in the housing market for sellers, thanks to a limited supply of new listings and easing mortgage rates. Homeowners are reluctant to sell due to low mortgage rates, and sellers are now receiving more offers per home. Foreclosures are expected to remain contained due to homeowners’ significant equity. Although office spaces have faced value declines, they are still seen as important for companies to maintain a corporate culture and train new employees.
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