Real Estate slumps 21% in H1 2022, mortgage rates expected to be 5.5% at the end of 2022

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Real Estate sector lost 21.2% in H1 2022, and the Real Estate Select Sector SPDR ETF (XLRE) was down 21.1%.

Never seen rising mortgage rates (currently at 5.7% from an average of just 3.2% at 2022 start), rising home prices and an imbalanced home supply and demand have been some characteristics of the U.S. real estate sector in the past 6 months.

For the first half of 2022, the following emerged as the top gainers/losers; Opendoor Technologies (OPEN) and DigitalBridge (DBRG) are amongst the major losers while Mortgage REIT Chimera Investment (CIM) also joins the list.

Two healthcare REITs - National Health Investors (NHI) and Sabra Health Care REIT (SBRA) are among the major gainers; NHI in early June reaffirmed FY22 guidance indicating a marginal increase in May portfolio occupancy.

Residential REIT, American Campus Communities (ACC) saw a 13.2% gain; it beat its Q1 earnings consensus in its last quarterly report before its sale to Blackstone.

In May, new home sales rose 10.7% M/M while Y/Y it saw a growth of 5.9%; existing home sales dropped 3.4% in May marking its straight fourth month of decrease and on Y/Y basis it sees 8.6% dip.

The market generally believes that it will firmly be a seller's market with buyers not having an advantage in the market.

While housing affordability is at the lowest point since the financial crisis, rental market also does not indicate any good signs with occupancy rates at all-time highs and rents on the rise.

A chief economist at CoreLogic forecasts a gradual slowing of home price growth down to single-digit appreciation a year from now while U.S. Bank chief economist sees a strong housing market with low housing inventory, low unemployment, wage growth and a large demographic of buyers entering their peak homebuying years.

Economists at Realtor.com recently revised their forecasts:

It further added, "While housing costs remain high, pushing home shoppers to make tough choices about their budget priorities, the number of homes for sale is expected to continue to grow, building on the turnaround begun in May."

Most industry analysts foresee that inventory will remain scarce in 2022 and 2023 with slower price appreciation than it is seen in past two years; rise in listings and high demand are seen continuing.

Freddie Mac expects some cooling in housing demand, forecasting house price growth to slow from 15.9% in 2021 to 6.2% in 2022 and then to 2.5% in 2023; Q4 home sales expected to come in at 7.1M and touch 6.9M in 2022 and increase to 7M in 2023.

Altos Research indicates more than 25% of homes on the market right now have cut their price contrary to how prices have been climbing over the last two years.

Comments

[Sound Investor]

EQC is on your chart as the 3rd highest performer. Thats not saying much given that it currently isn't really an operating company but wouldn't investing in a cashed up company backed by Sam Zell looking to cherry pick assets in a real estate downturn be exactly where you would want to be positioned in today's market?

[Harsh Truth]

The real culprit is the real estate. Real Estate bubble is driving this current phase of inflation and recession as it is pricing out the low wage earners, many would be workers are just not able to rent the accommodation to contribute to the economy. The bursting of Real Estate Bubble is needed to save the workers, economy, stock market and the humanity.

[Keep it Country]

@bondsmoker

Man, you know your stuff! You seem over qualified for this thread.

[Jim_Berger]

When Jay the Great, the ruler, gives the thumbs down, so does the real estate market (like every other market). Long live Jay, long live the king, long live the money printers.

[Oramokoma]

Inflation at 9% and 30 year mortgage rates at 5%...how do you factor in losses in 5% or making and real money? Mortgage rates should be 15%

[bondsmoker]

@Oramokoma

Yeah, if inflation were going to stay at 9% for the duration of the loan.

No one thinks inflation will stay at these levels for long.

In the meantime, it is indeed a messy situation, particularly for investors - inflation running 9%, but bond yields - even on high-yield bonds - well below that....

It can't last. Something has to give.

[Jim_Berger]

@Oramokoma if mortgage rates are at 15% (in theory I agree with you), all western economies go to hell. Asset prices are extremely inflated, of course they are not "real", but what is real or not is up to central banks to decide, and they want those asset prices sky-high (trickle down, wealth effect, blablabla).

[Diesel]

Looks like real estate bubble already burst. I'd start buying the dip soon.

[Anthony.Leut]

@Diesel Hey Diesel, what kind of cost savings do you get though if the mortgage rates are up over an extended period of time? Thanks! :)

[parity]

Those 5.5% rates assume some sort of a recession I guess. I think the risk is on the upside. The Fed now believes fed funds will be in the 3s in 2023. Also, we have not even started seeing MBS QT. That in itself can lead to widening spreads and much higher mortgage rates than 5.5% if the Fed actually follows through with actual selling.

[bondsmoker]

@parity

I think some sort of a recession is near certain.

Anyone can see, anecdotally, there has been a drop in productivity.

Asset prices will sink back down (stocks & real-estate), as money-supply is tightened.

Then layoffs will ease wage-inflation.

Then FED will need to reverse course, and lower rates to respond to rise in unemployment.

This is one of the easier forecasts to make. Many see it coming - and they are mostly right. Its coming.

[parity]

@bondsmoker I don't have a problem with a recession in real terms. If it is high inflation / real recession, then mortgage rates will continue to be high or higher regardless of a recession or not. We currently have negative real rates.

[sigalum]

@bondsmoker Sure we all see it coming, but when? You forgot to mention TIMING of these events, which makes all the difference.

[User 31614085]

My guess..the high end stuff will probably languish...anything under $350K will sell like pancakes because of how high rents are going..

[bondsmoker]

@MJL987

For now. Rents will come down as unemployment goes up and new supply hits the market. It will take a year or two to fully play out.

[User 31614085]

@bondsmoker rents rarely go down...

[Wantingtotravelagain]

@MJL987 $350k is high end? Depends on where u r located...

[r Negoro]

Yup i knew SAFE was a dud even when some famous SA author is promoting it.

The yield is way too low.

[sethmcs]

I recall in finance 101 the relationship between risk free rate of return (treasuries) and all other assets. The relationship is simple if yields on treasuries rises then the cost of all other assets must come down. Especially interest rate sensitive assets like real estate. Make no mistake higher rates will lower housing prices with a lag. My guess is if 5.5% mortgages fail to cool the market maybe 6.5% or 7.5% or 11% will do the trick. It is mathematically impossible to lower inflation (considering how inflation is calculated) without cooling housing prices.

[bondsmoker]

@sethmcs

5.5 to 6.5% will do the trick.

House prices got here on 3% rates.

[mrNCSU]

@bondsmoker and gobs of stimulus and a student loan pause.

[HPBunker]

@bondsmoker

"5.5 to 6.5% will do the trick.
House prices got here on 3% rates."

I tend to agree. I wonder if Realtor.com (which is run by the National Association of Realtors) has ever forecast a y/y home price drop? My very strong guess is, "no", not even in 2006.

[shafeia]

I love $OPEN at this level especially with selling weekly calls. Their B/S is very strong. Looks like they reduce their inventory of Homes and paid off some debt! IMO stocks in general are down too much and the risk/reward is favorable!

[Ambient Insight]

@shafeia yes. The stock is pricing in a bankruptcy, which makes zero logic. Markets views the business model as worthless, can’t make money during soaring housing market, now going to zero in down market. Once market realizes $OPEN becomes more successful in down market the stock will explode higher.

[adamjf]

@Ambient Insight how are they going to make money in a down. Arket when they bought their inventory at all time highs?

[apeto]

So mortage rate is currently 5.7% and its expected to be 5.5% by end of the year? This article is saying mortgage rates will trend down for the rest of the year?

[1gdanka]

The RE slump mentioned may be due to debt levels which was NOT noted. High new debt is the devil when needed during rising rates. Nearly all failures are due to high debt or an unaccountable management.

[Kyle54]

@1gdanka Especially looking at (I firmly believe we are already in) a recession, lending institutions will be under a microscope if making irresponsible loans.

[Tinkalicious]

For younger people looking to purchase a home they need to take a step back and lower their expectations. I bought my first place for $45,300 in 1999 (a 2 bedroom condo). I wanted to buy the one for 180k in the nicer neighborhood but quite frankly I could not afford it.

There are plenty of homes available... just not where they want to live. That is their problem, not the markets.

[Pretired]

@Tinkalicious It is market specific. I live in Oregon---there is growth boundary which means you can't develop land outside the growth boundary for new housing. That limits supply. In Seattle, large bodies of water/mountains and highways already at max limit opening of new areas for housing. Most of CA coast is similarly geographically constrained/highway limited. I think the cheap housing is in the more rural states---but getting a good paying job is harder in low housing priced areas.

[MtnRunner]

@Tinkalicious Montana here and even the trash houses have doubled and tripled it's ridiculous and stupid!

[Plutonius X]

@Tinkalicious Just look at the case shiller home price index. That is not sustainable.

[Munderah St]

Having noticed anything, long $NHI

[Winnertakesall]

Real estate is due for a crash, and that's coming from someone who owns numerous homes and condos. If it wasn't for capital gains taxes I would sell all of them. Essentially the government wants everyone leveraged up on homes and indebted so they'll keep working. Some of these people foolishly think its an inflation hedge, but a word of caution most of these buyers are buying homes based on what they can make a payment on. Personally I think rates will continue to go up... lot of people are retiring, and the younger generation is full of dreamers who don't want to work. Look at the labor force participation rates for men, every year it gets lower and lower.

[bondsmoker]

@Winnertakesall

Labor/productivity is indeed the central issue.

I think a recession is going to right the situation. We need a painful sweep, so people get back to work.

And I'm talking productive work - not crypto analysts, and other crap like that.

[YellowHair]

@Winnertakesall re the labour force participation rates for men going lower, I am curious. Could this be from the older generation’s view of having men in the workforce and women staying at home…you know, those older males retiring? Or could it have something to do with the shift of more equality of the sexes and thus more females in the workforce? Or could it have something to do with the increase in stay-at-home dads in relationships where the female spouse earns a higher income? Or a combination of several of those societal shifts? Or something else entirely?

[Jim_Berger]

@Winnertakesall There is some truth in it, but - to be fair - the younger generation was also spoiled by a decade+ of record low interest rates and financial nonsense. What should they expect ("it can only go up") when Greenspan & Co bailed out everything and everyone each time something went wrong? Self-responsibility is dead, central banks messed it up big time during Corona (by bailing out the over-leveraged caught on the wrong foot). If I were young, I wouldn't wanna work either (what for, cards are shuffled, who's rich will always be rich and richer > central banks take care of it).

[Jorel Boston]

"While housing affordability is at the lowest point since the financial crisis, rental market also does not indicate any good signs with occupancy rates at all-time highs and rents on the rise"

That's bc those who have a roof over their heads can't afford to move(eg 70 yo lady who pays $700 for a 2 bedroom she's been in since 1965) In NYC even homeless people are given housing vouchers for $2218, can you imagine if your a young man trying to get his own 1st apt??

[bondsmoker]

@Jorel Boston

Rental markets will eventually become more affordable - there's a construction boom for rental units.

It always cycles like this. Developers don't accurately factor in all the other units under development, and the likely higher vacancy rates/reduced rents resultant.

It will take time though. Over-supply in rental units will likely coincide with mass lay-offs from companies who realize they are losing money by keeping scads of unproductive workers at obscene salaries on the payroll.

It will be a double-whammy. Lots of units against lots of unemployed people. What will happen to rents then?

No, NYC & San Francisco won't become reasonably priced. But most of US will take a beat-down.

[Jorel Boston]

@bondsmoker Yes that's why I moved out of NYC first few 💸 I recieved. That's also why I'm highly productive at my job, bc if they do start slashing they have to cut the most unproductive ones.

[bondsmoker]

@Jorel Boston

Signs of employment market troubles already starting to show. Hiring freezes and/or announced layoffs from premium companies already kicking in.

We're not talking burger-flipping jobs drying up - we're talking six-digit salary white-collar jobs.

Companies are realizing they are killing themselves fighting to hire employees in this market. Ever-higher pay by ever-lazier workers. Eventually, employers decide - OK, enough of that, let's just downsize instead....

[thebellsareringing]

I recall when mortgage rates were 11%-+13% range around 1985.

[bondsmoker]

@thebellsareringing

Yeah, that won't happen again.

I'm guessing 6.5% tops.

A recession will kick in, unemployment will rise, and the FED will have to ease.

It will all be for the good - just like the crash in 2008 timeframe was for the good. Markets are forced to regroup & refocus on most efficient ways to meet real demand. ie - fewer crypto-scams, and more Fried Chicken.

[Ivybanks]

@thebellsareringing I had a 10 1/4 30 year in 1989 when I purchased my first home and it was during a strong housing market. Couldn't happen today.

[thebellsareringing]

Now there are bidding wars on rent costs. People who sold their homes would rather rent vs. buying now is one of the reasons.

[superartus]

5.5% is too low to curb home prices.

[Too Bad]

@superartus No way I was affording my current home at 5%.

[Pretired]

@superartus 5.5% interest rate is not high for last 40 years. The problem is house prices are priced for 3% interest rates. There is a disconnect...since there is ample demand and limited new construction----I don't think the housing market will collapse like it did in 2008. It looks like there will be a seller's strike..so I'm thinking 10-15% type housing price correction depending on market.

[bondsmoker]

@Pretired

Bingo. Housing prices don't typically crash. 2008-2010 was a bit of an anomaly.

What normally happens when house priced run hot - they flat-line for a decade, and resale volumes decline.