Ariel view of residential neighborhood.
A typical real-estate cycle occurs in four phases: expansion, hyper supply, recession and recovery.
But hyper supply is missing from this current cycle, and experts can’t agree on what will come next.
Some say a correction, while others believe a dramatic downturn is in store.
Rising inflation and interest rates have cooled off the red-hot housing market, and many Americans wonder what will come next.
One thing is certain — it’s a market the likes of which we haven’t seen before.
In a typical real-estate cycle, four phases occur: expansion, hyper supply, recession and recovery. But hyper supply is missing from the equation this time — and it’s thrown the entire cycle for a loop.
“In the typical narrative the ‘hyper supply’ is because construction companies over-build, and there becomes a glut of housing units,” Todd Metcalf, the senior economist at Moody’s Analytics, told Insider. “This occurred during the housing bubble preceding the Great Recession. However, at the national level we still see a severe housing shortage.”
In place of hyper-supply, Metcalf says the housing market is now entering “demand exhaustion.” During this phase, home prices fall due to a lack of affordability rather than a surplus of housing inventory.
“This occurs not because the demand for housing has gone away, but because rising interest rates have made it so that many people can no longer afford to buy a new home,” he said.
Indeed, rising costs have put a lid on housing demand. As buyers grapple with soaring inflation and interest rates, it’s led to a decline in bidding wars, slower home price growth and an uptick in the national cancellation rate among homebuilders.
But while Metcalf believes these signs point to buyer burnout, Chris Low, the chief economist at FHN Financial, says they most likely indicate a housing recession instead.
“Housing is a leading indicator of the broad economy,” MarketWatch first reported Low saying. “I would say housing is in a recession, and that likely means the rest of the economy will be in a recession soon.”
If the real estate market is in a recession, either one of two things could happen next: a correction or a crash. A correction would entail a gradual downturn in prices to more sustainable levels, while a crash would result from rapid declines caused by widespread panic from homeowners and investors.
Holden Lewis, an analyst at NerdWallet, says the latter is unlikely to happen.
“Builders haven’t overbuilt and lenders have strict lending standards,” he previously told Insider. “Put those trends together, and you have a housing market that’s unlikely to crash anytime soon.”
José Torres, the senior economist at Interactive Brokers, has a less than rosy outlook.
“At this point, housing is unreachable when considering household incomes and individual incomes,” Torres told Insider. “The percentage of the average monthly payment to household incomes and individual incomes is at record highs — similar to levels that we saw during the 2008 financial crisis.”
Torres believes this has created “a perfect storm” in the real estate market that will lead to a severe pullback in home prices. “We’re going to see something very similar to what we saw during the Great Financial Crisis” in terms of price declines, he said.
While home prices have yet to plummet, data does show that the share of sellers slashing their asking prices has hit an all-time high. Additionally, the portion of homes selling above list price has now fallen for the first time since June 2020. However, despite waning affordability, prices are still rising across the country. This is why housing experts just can’t seem to agree on the current phase of the real estate cycle.
Whatever side of the argument you are on, at least one thing is clear — the housing market is slowing down. That could mean a correction or crash is right around the corner.