Investors view homes as one of the safest ways to diversify their investment portfolios and guarantee a steady stream of long-term income as its value increases over time in proportion to the markets. Sadly, however, these past two years have been nothing but a seller’s market riddled with contradictions where home prices still range at historically high rates and a clash between priced-out buyers and those willing to settle with the overvaluation in fear of further price increases.
But, with the height of the Covid-19 pandemic outbreak long gone and economic activity slowly on the rise, some analysts predict that a price correction isn’t that far off for the real estate market.
Nevertheless, no matter how promising and optimistic the statement may sound, it doesn’t change that due research, examination, and comparison are necessary. So, to understand the full scope and limitations, we’ll be going over the factors in favor of a price correction and those that say otherwise.
Rising Home Prices Can’t Stay Up Forever
At the fundamental and technical level, price corrections play an essential role in maintaining market momentum. Nothing that keeps going up can sustain that volatility without making a lower high to test for support. Furthermore, positive signs of economic recovery across different sectors reinforce the expectations of a declining trend for these overvalued assets because income growth will soon catch up with the home prices, and its momentum is highly unsustainable.
Income Growth Will Catch Up Soon
Last week’s NFP change reported 678,000 new jobs in February, and in unity with a rising labor market, wage gains will follow right behind the trend. Of course, there’s no denying that we’re still far from a full recovery for labor supply, but, historically, home prices rates that outpace the income growth subsequently follow a fall. And, even though past performance is never indicative of future outlook, the forecast is established on sound economics.
Unsustainable Upward Momentum
As per a technical point of view, the upward momentum presently seen in the real estate market is unsustainable, and with home prices near overheating, a cool-off period will become necessary in the long run. Sure, there may be minimal bearish signs or selling pressure to characterize investor pessimism, but any sharp increase in price without rest is due for a sharp drop to reach equilibrium.
However, Things Aren’t Clear-Cut Perfect
In contrast, despite the wishes of many investors to cycle back into a buyer’s market, things aren’t clear-cut perfect for those that expect a price correction anytime soon because the markets remain volatile, especially with all the global events and constraints experienced. Specifically, the real estate sector continues to battle with a tighter-than-expected housing inventory and rising mortgage rates, both of which will propel prices further, at least in the short term.
Tighter-Than-Expected Housing Inventory
Although most forecasts hoped for a positive turn of events for housing inventory, things took a turn for the worst as homes hit a historic shortage, driving prices even higher and causing more pain for potential buyers. And with a supply chain crisis and inflation rates making it a logistical nightmare to ramp up housing projects, some expect that we won’t see any improvement until early 2023. As a result, home prices may very well remain high and could push for even higher unless the circumstances change.
Rising Mortgage Rates
While rising mortgage rates should technically persuade buyers from settling with overvalued deals, it will have the opposite effect in the short term because homebuyers will fear what’s to come next if they don’t secure a roof over their head ASAP. As a result, before mortgage rates can rise any higher, more people will look to buying homes now instead of later because there’s no guarantee how long they will have to wait for a price correction.
What Approach Should Investors Take Right Now?
As for the approach that investors should follow right now, given all the uncertainty looming over the real estate market, we suggest you examine and compare the extent to which these market conditions impact your local housing economy. At the end of the day, while the situations mentioned above affect everyone, the severity and reaction vary significantly from state to city and high-value locations.
Therefore, you must take matters into your own hands by observing the shifts in demand and maybe even recruiting more candidates to increase the capacity of your real estate business.
Reassess Your Risk Appetite and Adapt Accordingly
Overall, since there’s zero assurance which way the cookie will crumble for the real estate market, it all boils down to reassessing your risk appetite and adapting accordingly to where and how your portfolio stands to benefit from these market conditions. So, take the advice with a grain of salt, and take extra precautionary measures before deciding to buy or abstain from future real estate investments in 2022.
