The US housing market is about to undergo a massive structural shift in the coming 18 months and we will most likely see anywhere between 20-40% price declines in certain parts of the country. This in turn will present a tremendous buying opportunity for creating and building generational #wealth to those who are liquid enough and ready to take advantage of all the deals that will be available out there. The serious headwinds that the US housing market is currently facing are the result not only of the tightening monetary efforts by the #federalreserve (rising interest and mortgage rates) but also due to the unfavorable demographic composition of the US population.

In addition to that, the easy monetary and fiscal environment throughout the last decade has drastically increased the percentage of investor ownership in the housing market, and investors are the first ones to leave (sell) when their ROI is no longer there.

Also, construction activities have absolutely skyrocketed since the pandemic hit and all these houses and apartment buildings are just hitting or still about to hit the market.

Inventories have nearly doubled YoY in states like #California, #Texas, #Colorado, #Nevada, #Idaho, #Florida, #Utah, #Arizona etc. while mortgage applications are sitting at multi-year lows. Home prices in cities like San Jose, CA; Austin, TX; Boise, ID; Colorado Springs, CO; Tampa , FL and many others reached absolutely ridiculous levels of nearly 10 times the average salary in the respective city just couple of months ago. This is why over 67% of all current listings in these specific housing markets have already seen broad, substantial and multiple price cuts in the period May-July, and this trend is about to continue.

To make things worse, over 30 million #babyboomers have left the workforce (retired) throughout the last 24 months. With their house valuations sitting at all-time highs, with extremely high property taxes and maintenance costs, many retirees will have to sell their homes and probably go out and rent where they live in order to make sure they have enough to live on for the next 20-30 years, as their pension funds are definitely not going to provide them with the financial stability and support that they had expected.

US Housing Market

The generation that is expected to absorb the new supply in the housing market are the #millenials They are currently entering into their 30s and should be purchasing their first house, 2nd home/investment property etc. However, there is one main problem – the millenials are the generation with the highest amount of personal #debt in history. With over $1.6 trillion in #studentloans, nearly the same in credit card debt, auto leases, etc. these young adults are not really well positioned to buy any real estate, especially at the current prices and with rising mortgage rates.

The housing market has been slowing over the last few months as the near 6% 30-year mortgage rates together with the ongoing economic contraction and the expected recession ahead have put many potential buyers on the sidelines for now.

The market is quickly turning into a buyers market, where clients can enjoy substantially higher bargaining and negotiating power. In fact, according to RedFin, we are currently seeing record levels of purchase agreements being called off by the buyers in the last 4-6 weeks. Over 63,000 home purchase agreements were canceled in July, representing 16% of all home purchase agreements signed for that period. This is the highest rate in more than 2 years.

“Homes are sitting on the market longer now, so buyers realize they have more options and more room to negotiate. They’re asking for repairs, concessions and contingencies, and if sellers say no, they’re backing out and moving on because they’re confident they can find something better,” said Heather Kruayai, a Redfin real estate agent in Jacksonville, FL. “Buyers are also skittish because they’re afraid a potential recession could cause home prices to drop. They don’t want to end up in a situation where they purchase a home and it’s worth $200,000 less in two years, so some are opting to wait in hopes of buying when prices are lower”

Source: redfin.com

Mass Layoffs

Last but not least, we must point out to the fact that massive country-wide layoffs have already started especially in the technology sector where many well-paid tech professionals have suddenly found themselves being unemployed.

Here is a very small portion of the companies engaged in heavy cuts to their workforce and the respective number of layoffs that they have already completed in 2022 – Better (5,000), AppLovin (300), Blend (200), Bolt (170), BlockFi (250), Carvana (2,500), Coinbase (1,100), Compass (450), GoHealth (800), GoPuff (1,950), Groupon (500), Invitae (1,000) and the list goes on including more than 500 different entities and hundreds of thousands of people already being laid off so far this year.

Research shows that 1 tech job is responsible for the creation of up to 5 new jobs in the service sector, as tech professionals usually enjoy higher disposable income amounts and tend to spend and stimulate the economy as a result. So, if tech jobs are being closed right now, and these high-spenders have lower disposable income in a rather uncertain time for their industry they will be less likely to spend on products and services that they used to before. This will undoubtedly lead to a wave of layoffs in the services sector as well, which will put further pressure on the economy.

What makes us even more worried is that the Federal Reserve wants to see precisely that in order for the exceptionally tight labor market in the US to loosen up. In other words, the Fed is not going to come to the rescue, making a pivot to their tightening efforts just because the unemployment rate starts rising as they understand that this is the only way to normalize the extremely hot labor market conditions. However, the unemployment rate has the historical tendency of moving slowly lower and staying rather flat for quite some time, before sharply accelerating higher, which we believe will happen once again in the next 2-4 quarters. We believe that the rising interest rates, weakening in productivity and economic output and the upcoming, necessary and targeted spike in unemployment will produce an economic recession that would last anywhere between 6-18 months.

Thus, be careful, patient and proactive as the next 12-24 months could very well prove to be the largest wealth transfer in history. Make sure to be on the right side of the transfer equation.

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