Residential Real Estate
The 2023 residential real estate market bust is a story of two tales. The good news is that the drop in new home prices by a further 18% year over year, is making home ownership more affordable for the next generation of homeowners.
But for existing homeowners who bought residential real estate in the early 20s, the peak of the bubble, the real estate market bust is unwelcome.
The latter homeowners could be in negative equity, defined as when the value of the borrowed asset falls below the loaned amount.
Shelter is a necessity, particularly in the northern hemisphere cold winters, so some homeowners in negative equity might ride it out.
However, the likelihood for those in negative equity to ride out the 2023 residential real estate bust depends on homeowners’ ability and willingness to make payments.
A typical mortgage rate has more than doubled for an average of 3.7% in January 2020, and to make matters worse, food inflation has almost doubled since 2020.
“From unprecedented easing to record tightening could mean a policy-driven real estate market bust is now deadhead,” writen in a piece entitled, Real Estate Bust, dated May 2023.
Fast forward six months and the time lag of policy tightening is now impacting the residential real estate market
Core inflation, propaganda data, excludes necessities, food, shelter and energy, is a worthless figure to analyse.
I want to know how much it costs Joe Public to put the cornflakes on the table, shelter over his head, and gas in his tank, and then I can work out how much money households have for discretionary spending.
The residential real estate bust could worsen as the worst cost of living crisis, a currency crisis, in a generation makes mortgage payments unaffordable at current mortgage rates
Let’s assume that most home buyers in the early 20s, fixed their mortgage rates at the lower rate before the Fed tightening cycle.
If the 2023 residential real estate bust continues to gain momentum in 2024, negative equity homeowners could decide to hand the keys to the bank. Think about it. Why continue making payments on a home for which you paid 500k in 2020, financed with a 400K mortgage when the property is worth 250K in 2024?
The maintenance costs on properties and taxes are sky-high, making renting more attractive.
A residential real estate bust in 2023 could lead to a tsunami of mortgage defaults in 2024
That tsunami of mortgage defaults is a virtual certainty for commercial real estate, double-fisted by higher cost of services mortgages, a recession and a macro trend of remote digital working.
2023 residential real estate market bust gaining momentum
Prices of New US Houses Drop Further, -18% Year-over-Year, Sales Drop, High Inventories Rise Further, and the supply of residential real estate jumps.
So, in 2023, there is oversupply, and buyers are on strike; that equation equals a residential real estate market bust and a tsunami of loan defaults in 2024.
Who will be able to benefit from the real estate market bust?
Does the Gig and FIRE economy mean many young buyers won’t qualify for a mortgage?
Maybe this is the beginning of centralised homeownership.