Spark Global Limited Reports:
Following the pandemic, we are experiencing a surging real estate market, which begs the question: Is there a market correction on its way? Of course there is. I’m not an optimist nor a pessimist on this issue, just a realist.
Some market watchers are predicting that when it does happen, it will not be as severe as the last one, while others anticipate something of similar degree or even worse.
When will the market correction arrive?
I have no idea, but there will be warning signs, and that’s what this blog article is about. Fluctuations in market activity are common, but unseasonal and ongoing changes of any of the signs listed below can often be red flags. Additional indicators can be some of the factors that led up to the last market bust; there are plenty of articles online with which to familiarize yourself.
What will be the early signs?
Some early warning signs of housing market correction are:
A) Listing inventory in MLS starts to climb steadily. Increasing inventory is generally a sign that buyers have stopped buying (due to prices being too high or a lack of consumer confidence), or there are just fewer ready, willing, and able buyers in the marketplace.
B) Days on Market for listings increase. This event is usually linked to item (A) above.
C) Listing prices begin to stabilize and reductions in listing prices become more common, which is a sign the market is becoming saturated.
D) Declines in building permit applications. Builders don’t want to be stuck with inventory when a correction happens, so they watch their market indicators very closely.
E) Capitalization Rates start to climb for commercial properties, resulting in declining values as indicated in the increasing cap rate calculations below.
Income ÷ Rate = Value
$50,000 ÷ .08 = $625,000
$50,000 ÷ .10 = $500,000
$50,000 ÷ .12 = $416,667
F) Rapid changes in residential mortgage interest rates. It starts with a lowering of rates to attract buyers, followed by increases in rates when lowering rates didn’t inspire additional buyers to purchase. This pattern often indicates that those buyers who can afford to buy already have.
G) A common indicator of item (F) above is a decline in the number of mortgage applications. One source of information is Ann O’Rourke, who publishes mortgage application data in her weekly appraisal news email. It would also behoove prudent appraisers to periodically go online and read the mortgage and banking industry’s news updates for their current trend analyses, and also watch for mortgage activity switching from purchase mortgages to refinances.
H) Having to go to alternative neighborhoods for comparables because home prices are growing out of reason for the immediate market area.
I) Relaxing of lending standards and predatory lending activity (non-prime is just another word for sub-prime). A man I know told me in 2008 he’d lost his house to foreclosure. He said, “A guy like me never should have bought a house, but I knew this broker who had a friend in the mortgage business, and all of the sudden I’d bought a house…I’m much happier now just paying rent every month.”
J) Significant increases in mortgage defaults and foreclosures. There’s potentially a huge time bomb hidden among all the delayed foreclosures and deferred payments related to the COVID-19 programs.
K) Major problems in the overall economy and stock market woes. Think inflation and stagflation.
L) Fraudulent flippers showing up in significant numbers. Markets with rapidly increasing prices are what fraudulent flippers’ dreams are made of. They can easily fly under the radar because appraisers are able to find sales high enough to support the inflated prices.
M) Media reporting that the market has peaked is a sign. Housing affordability indicators beginning to show declines is another. Read those newsletters from your E&O Carrier; they keep an eye on the real estate world and don’t like to pay claims.
Recently various areas across the U.S. have experienced “over-valuations” nearing 30%. Recent statistics released by the local Realtor Association show average prices of existing homes are up 41.7% in the past year.