Will house prices bottom out in 2023?Investment institutions are ready to move

[January 07, 2023]Hi everyone! Welcome back”US real estate hotspots: Li Ou’s Notes” today is the latest episode of the New Year, the content will talk about the latest housing market ups and downs, the latesthouse price indexData analysis, builder updates, and the latest real estate research models.

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This time the first updatenew houseAccording to the city’s data, because December has just passed, according to the latest statistics from the National Association of Realtors, the annualized total of existing home sales in November was 4.09 million units. This is seasonally adjusted data, a decrease of 7.7% from October. A drop of 35.4% from November 2021. Such transaction data represent the lowest level of existing home sales in November in 12 years.

However, this is still behind the data, because the transaction record in November is actually a contract that was signed a month or two ago, and it was only calculated in the database in November after the real transfer of ownership. But the mortgage interest rate has risen even more later, so the current market downturn is likely to be at a lower level. This is the part that everyone should pay attention to.

Separately, total housing inventory at the end of November was 1.14 million units, down 6.6 percent from October and up 2.7 percent from a year ago. In terms of prices, the national median existing home price was $370,700, still up 3.5% from a year ago. We can see that the supply in the housing market is still very limited, and sellers are unwilling to sell their houses. On the one hand, they are unwilling to lower the prices at the previous peak. On the other hand, they are unwilling to face the current higher mortgage interest rates.

Recent interest rate cuts may have limited stimulus effect

From the perspective of interest rates, the 30-year fixed interest rate has fallen from the highest 7% in early November to below 6.5%, which is still a very high level. It is just that the decline from November to December should be beneficial to buyers. A boost to stimulate purchases, which may be shown in subsequent data releases, but since the winter festival is the off-season of the housing market, the stimulus effect of interest rates may not be very great.

Of course, I think everyone is still most concerned about the decline in individual markets. Here I will also provide you with a few reports. The first is a survey by Realtor.com. They estimate that in the past year, that is, from December 2021 to December 2022 Year-over-year change in square-foot prices for the nation’s 100 largest metro areas in April. They then came up with the five metro areas with the largest increases in 2022, and the five metro areas with the largest decreases.

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But it should be noted that Realtor.com tends to accommodate diversity, so the report will be limited to only one metro area in a state. For example, if both San Francisco and Los Angeles had large declines, but it is possible that San Francisco fell even more, then only San Francisco would be listed in the report to represent the largest metro area in California.
Clean world: US house prices ready to bottom out? Is the investment institution going to rush in? ｜The lowest sales volume in 12 years｜The largest price adjustment since World War II｜new houseBuilders who can’t sell are in a hurry｜Working from home can actually help lower housing prices? 【US real estate hotspots】1/5/2023

Biggest rises and falls in house prices

I put their reports into a simple table (Table 1), and first look at the top five with the largest increases per square foot, in order of Omaha, Nebraska, Jackson, Mississippi, and Wisconsin, Kansas. Chito, Milwaukee, Wisconsin, and Little Rock, Arkansas. What they have in common is that they all have an increase of 20%, and they are all areas with affordable housing prices. Geographically, they are more biased towards the central region of the United States. The median house price is basically lower than the national price, and only Milwaukee is roughly equivalent to the national median. So now for buyers, affordable housing prices will be a major focus of choice.

Next, let’s look at the top five with the largest price drops per square foot (Table 2), which are Boise, Idaho, Denver, Colorado, Sacramento, California, New Orleans, Louisiana, and Chicago, Illinois. It seems that these declines are not large. This is also because of the supply problem that has been mentioned before, and there is still a large demand, so the price is still slowly falling.

Among the top five, the top three are all due to the cooling down after the wave of moving after the epidemic. New Orleans is mainly because it is vulnerable to the impact of hurricanes, and Chicago has actually dropped very little, and housing prices are still very low, so It should be because of the diversity constraints that got Chicago on this list, otherwise there would be more cities in California added to the list.

But according to Keith-Shillerhouse price index(Case–Shiller Home Price Indices) shows that US house prices have fallen for 4 consecutive months. The most recent data was a 0.3% drop in October. Overall, U.S. home prices have fallen 2.4 percent since peaking last June. Although it feels like the decline is very small, it is actually the second largest housing price adjustment since World War II. The first is of course the subprime mortgage crisis in 2007, which saw the deepest decline. In fact, the cooling of the real estate market is often shorter and smaller than the increase, which is why so many people always want to invest in real estate.

As of October, U.S. home prices fell 2.4%, which is back to March 2022 levels. If the decline extends to 10%, we will be back at October 2021 levels. A 20% drop would bring us back to February 2021 levels.

How much might house prices fall?

How much will the market drop?According to Moody’s Analytics, ifeconomic recessionIf it doesn’t come, US house prices will fall by 10%. If a recession does occur, the peak-to-trough decline is expected to be between 15% and 20%. In the last subprime mortgage crisis, it fell by 26%.

While U.S. home prices are falling, they are still rising substantially. Because the house price in October 2022 is 38.1% higher than the level in March 2020. Therefore, even if it falls by 20%, it will still be more than ten percent higher than before the epidemic. This is why the Fed has been insisting on hawkish interest rate hikes, because the decline in housing prices is still not effective enough to control the inflation rate.

If you look at the metro area, the Case-Shiller home price index has shown that San Francisco has an 11.2% decline, Seattle has 10.1%, San Diego 7.2%, Phoenix 5.4%, and Las Vegas 4.8%. These cities are all concentrated in the West or Southwest. The biggest drop in the Northeast is Boston, with a drop of about 3%, and the rest of the metropolitan area has a drop of between 1 and 2.

When might house prices bottom out?

Therefore, we now see that housing sales are cooling down quickly, and may soon bottom out. This requires further changes in interest rates, but prices are still being adjusted, and it seems to be the same trend from different data. In addition, price cuts can be divided into two types: one is the cooling of emerging cities, and the other is the cooling of cities with high housing prices in the west. The highest cooling has been in the range of about 11% or 10% from the peak. In the new year, most experts still predict that house prices will continue to fall, and only a few predict flat or low single-digit growth.
YouTube: Are U.S. house prices ready to bottom out? Is the investment institution going to rush in? ｜The lowest sales volume in 12 years｜The largest housing price adjustment since World War II｜New houses can’t be sold and builders are in a hurry｜Working from home actually helps to reduce housing prices? 【American Real Estate Hotspots】Episode 99

As for when housing prices will bottom out, we still have to observe the situation of inflation control, whether interest rates have peaked,economic recessionThe signal, as well as the number of houses in the market for further comprehensive analysis. But in general, it may happen this year or next year, so please continue to pay attention to the latest news on the American real estate hotspot channel.

How are builders responding to the new home sales crisis?

Just now we are talking about the existing housing market, that is, the sales of second-hand housing, and then we will look at the sales of new housing. In terms of new houses, builders are now in a hurry, because the sales volume is decreasing every month. The more inventory they have, the longer it takes, and the more losses they will make. Therefore, we can see that builders in some areas are willing to help buyers “buy low” loan interest rates, or give away upgraded home appliances and decoration options, especially in areas with a large number of new houses, which will give buyers more benefits.

Big builders like Lennar have begun aggressively marketing 5,000 unsold new homes to institutional investors, according to Bloomberg. Because the mortgage interest rates continued to soar in October and November last year, and finally exceeded 7%, many purchase contracts were cancelled. Coupled with the off-season sales in winter, these builders are now anxious like ants on a hot pot. I will find a large investment institution to negotiate bulk purchases. But according to Ali Wolf, Zonda’s chief economist, these institutional investors don’t just want a 10% price cut, they want a 20% or 30% price cut.

Investment institutions are estimating the timing of entry

Wolf told Fortune that because mortgage rates have fallen in recent weeks, some investors are worried that major buyers will return to the market. As a result, some institutional buyers are now trying to get in because they fear that there will be a surge in demand from major buyers and they will lose their chance.

Previously, many experts had predicted that 7% might be the peak of this wave of mortgage interest rates, and the interest rates would not be higher than this. According to Freddie Mac’s average 30-year fixed interest rate for the week ended January 5, it rose again to 6.48%, a two-week increase.

But at present, there are no actual transaction cases of investment institutions. The main factor is that the real estate market is still cooling down, and investment institutions are also evaluating. If the discount is not large enough, they are worried that the purchase price will soon be higher than the house price.

While firms like Blackstone Group have made it clear that they want to continue adding to their real estate portfolios, some institutional buyers are taking the sidelines for now in the face of the ongoing real estate correction.

Builders Turn to Rental Housing Communities

In addition, in the face of the low temperature in the market, builders also resorted to another set of countermeasures, and began to turn to the construction of independent housing rental communities, because since the pandemic, many renters are eager to have extra bedrooms, laundry facilities and large enough backyards. But so far they face a market with tight inventory, still high home prices and soaring mortgage rates that keep homeownership out of reach for many.

According to the National Association of Home Builders, single-family rental communities accounted for only 3 percent of development in the past few decades, but jumped to 12 percent by the third quarter of 2022. Take AHV Communities as an example. This is a developer of luxury single-family rental communities. Since 2013, AHV has managed nine such communities in Colorado, Texas and Washington state. Now they have 6 more under construction in Texas, Alabama and California.

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In response to the increasingly low affordability of potential buyers, the construction of single-family rental communities may satisfy the desire of renters without the burden of excessive mortgage pressure. In San Antonio, Texas, for example, a three-bedroom, two-bathroom house with a list price of nearly $290,000 would cost about $2,800 a month. By comparison, AHV is located in San Antonio’s single-family rental communities, where rents for similar properties range from $2,200 to $2,400, saving up to $600 a month. In this volatile period of high housing prices, it is also a trade-off for potential home buyers.

Will working from home keep house prices down?

Finally, I want to share with you a new perspective on the housing market. When we talked about the reasons for this wave of high housing prices, in addition to historically low interest rates, the work-from-home model after the epidemic must also be a driving force, so many people will be eager to have a larger space for use, so they will move Need fueled this wave of home buying.

But a new research model from the Economic Innovation Group (EIG), a bipartisan public policy group, argues that work-from-home models could help cushion soaring home prices in the long run. Because just like what happened since the epidemic, more people moved to the sun zone and to the suburbs, and these are places where housing prices are relatively much cheaper.

Because of working from home, many people no longer consider how close they are to the office, but more about affordability and whether the space is large enough. This change is a very unique event in the history of American real estate. In fact, we are all witnessing history, and at the same time we are figuring out what happened in the past two or three years that led to such an explosive growth in the housing market.

Therefore, although we know that remote work has driven up the housing market, housing prices, and rents, the research of the Economic Innovation Group believes that in the long run, people will stay away from those typical metropolitan areas, and more people will move to cities with more affordable housing prices. Move to cities that have more new housing, not cities where new housing is hard to develop. Therefore, those big cities that lack housing for a long time will also be relieved of housing pressure, and there will be no such high upward momentum for housing prices.

And those sun belt cities and suburban cities, although housing prices will skyrocket in a short period of time, with thehousing market coolingIf there are more and more new houses, the cost of housing will be reduced, because these places have a faster approval process for the development of new houses, lower development costs, and lower land costs.

It seems that this will indeed slow down the pressure on Americans to buy houses, but the variable that exists now is that due to the possibility of an economic recession, developers are reducing the construction of houses. Once there is still a problem with the supply of new houses, it will not be easy for the price to drop to an affordable level. range. In addition, it is also a factor of economic recession. Remote work is also tested. How many companies still allow employees to work from home is also a key point. If the boss insists on office work, the tight housing market in the metropolitan area will not change much. , People still have to take care of their jobs. Only time will tell! ◇

Responsible editor: Li Yaoyu