The U.S. residential real estate market is in the midst of a market correction. The average 30-year mortgage rate is at 6.28% currently — the highest rate since 2008. Higher interest rates are limiting access to capital and making mortgage payments more expensive. Because buyers have reduced purchasing power — and there are fewer buyers overall — the year-over-year rate of home price growth is expected to fall from the current 20.6% to 0% with significant price decreases in overvalued housing markets.
Companies that serve hopeful homebuyers — like Redfin and Compass — have also been heavily impacted by the recent market slowdown. Share prices of both Redfin and Compass fell rapidly over the past week. Compass announced a 10% cut to its workforce and Redfin announced an 8% cut in SEC filings this month.
Until recently, the real estate market had been white hot. Since 1987, home prices have risen at a steady average of 4.6% per year. But since the start of 2020, U.S. home prices are up by 34.4%, with a 19.8% jump in the last 12 months alone. Low mortgage rates, increased buyer demand, limited housing supply and general inflation sparked this historic jump in home prices.
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But history shows us that the U.S. residential real estate market is cyclical and experiences significant booms and busts. Major U.S. residential housing crashes throughout history include the panic of 1837, the 1837 stock market crash, the 1929 Wall Street crash, the Great Depression and the 2008 housing bubble. Homebuyers saw a 12-month home price jump of 14.7% leading up to the 2008 financial crisis. And concerns are growing that we’re potentially seeing another bust cycle, with the most recent 12-month surge in prices five percentage points above those historic highs.
What’s Next for Real Estate
Real estate market conditions vary by location. And some locations might remain sellers’ markets. But in general, realtors’ and homeowners’ days of seeing 15 cash offers the day a house lists are likely over. As home prices begin to fall, we could see more of a buyer’s market. This affects both sellers and flippers. Sellers will likely lower prices. And flippers will likely see their margins go down with fewer buyers in the market to drive prices up.
But for investors — especially those with access to cash — this could be a good time to buy. The more access to cash an investor has, the less higher interest rates matter. Investment time frame also matters in a cooling housing market. Investors who want to buy and sell within a few months could easily see the value of their investment go down as they renovate a property. But investors who have a longer investment horizon — say, a few years — will be in position to buy at bargain rates AND sell into a recovering or booming market. And with the rental market booming, there’s plenty of opportunity to generate income along the way.
Investors should remember the first rule of investing: Buy low, sell high. It applies to crypto and collectibles. Real estate is no exception.
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