Single-family homes supply grows. Will home prices decline?

Millions of people nationwide switched to working from home when the COVID-19 pandemic began, something that has since become one of the most important conditions for workers when choosing the right job for them. Working from home was initially considered a temporary solution during the lockdowns, but it’s slowly becoming a permanent thing for millions of Americans across the country.

While working from home was something completely new for the majority of the companies and their employees, this concept undoubtedly heavily impacted the real estate market, resulting in skyrocketing prices caused by the growing demand. Some areas of Florida, North Carolina, South Carolina, and Texas swelled with out-of-state movers who left shutdown coastal cities in search of roomier, cheaper homes in the Sun Belt. However, many people who moved out of cities just headed for nearby suburbs within their state.

Corporate real estate investors recognized the ideal opportunity to invest in real estate right away. From nowadays perspective, they are mostly to blame for skyrocketing real estate prices in recent years leaving many traditional homebuyers unable to purchase a house. However, the Fed has been aggressively raising interest rates for months, causing home prices to fall due to high mortgage rates that are now approaching 7%.

A recent report shows that home sales declined for the ninth straight month in October, as higher interest rates and surging inflation kept buyers on the sidelines. Another report indicates that corporate investors are now pulling back even more than traditional homebuyers, as investor home purchases dropped just over 30% in the third quarter of this year compared with the same period last year, according to real estate brokerage Redfin. And some experts believe that this is only the beginning.

A large-scale housing slowdown is becoming increasingly likely as the supply of single-family homes grows while inflation is still very high and Americans struggle to keep up with the rising prices on literally everything. Some major tech companies have recently laid off thousands of their employees, while others are expected to follow. This is another proof that a recession is likely around the corner and that the housing market will be negatively impacted next year.

We are already seeing a decent decline in home prices, but this process might pick up speed if once-reluctant sellers start flooding the market with more supply in a rush to get ahead of further downside. According to Kieran Clancy, a senior US economist at Pantheon Macroeconomics, the housing market might get further disrupted because “inventory is now creeping higher as many previously-reluctant sellers start to worry that their home will fetch a much lower price if they continue to wait to sell.”

According to the National Association of Realtors’ data, the sales of existing homes are the lowest reported since 2012.

“That trickle of supply could quickly become a flood, though, increasing the speed — if not the ultimate depth — of the decline in home prices,” Clancy said. “We think prices need to drop by about 20% from their spring peaks in order to reach a sustainable level.”

On the other hand, however, some analysts are coming around to the idea that house prices could see a correction, but they still don’t expect an outright bust. This idea is backed by the facts that the employment rate is still very high, at least for now, and there are millions of frustrated would-be buyers who haven’t been able to purchase a home due to skyrocketing prices in recent years. However, recent layoffs might mean that unemployment rates will go up over time, especially in the case of a recession, and high mortgage rates might prevent would-be buyers from buying a home, again.