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What Comes Next For The Frenzied Real Estate Market?
A typical real estate cycle goes through four main phases, but it seems like the market is skipping an important step due to the ongoing housing shortage.
The real estate market is skipping a big step. According to Todd Metcalf, a senior economist at Moody's Analytics, the normal real estate cycle goes through four key phases: expansion, hyper supply, recession, and recovery. But the unique conditions of the post-pandemic housing market may have caused the real estate world to skip a step.
Instead of entering the “hyper supply” stage, which is caused when construction companies over-build, the ongoing housing shortages and covid-induced construction slowdowns have caused the real estate market to enter a phase of “demand exhaustion” instead. Metcalf said that the demand for new homes isn't going away, but rather high home prices and soaring interest rates are pricing buyers out of the market.
Mike Larson, a senior analyst at financial research company Weiss Ratings, said that he expects home prices to take an unusually long time to drop in this type of market. Without the normal glut of housing, it’s unlikely that will see any quick or significant price drops in homes for sale around the country. Although nearly one in five home sellers is lowering their asking price — the highest amount to do so since October of 2019 — home prices in some parts of the country are still rising. This indicates that the demand exhaustion phase is only just beginning.
Although it’s too early to say for sure, a recession will come next if the real estate cycle stays the same. However, this isn’t all bad news. As the market shows signs of slowing in the second half of 2022, some Redfin economists have hope that housing prices may begin to flatten or at least rise at a significantly slower rate by spring of next year.
Some experts even suggest that the summer of 2023 will be the opportune time to buy. According to real estate veteran Jonathan Miller, buyers are holding off on buying homes because of an affordability issue. The buyers are waiting for prices to drop, which will force sellers to lower their prices if they want to close a deal. However, prices won’t just drop tomorrow. In Miller’s experience, it typically takes one to two years to see a significant reduction in home prices. If Miller’s analysis and timeline are correct, buying a home may be an affordable venture again by the summer of next year. Potential homebuyers just have to be patient and let the current frenzy pass.
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