One real estate investor believes the housing market will experience a “black swan” event over the next year due to affordability pressures.
High interest rates in the U.S. housing market combined with still-high housing prices pose an affordability dilemma, Sean Terry, a former US Marine and founder of real estate investment firm Flip2Freedom, recently said on the “Real Estate Disruptors” podcast. Which may eventually force something in the market to break.
“How do you make housing affordable? If you have to raise interest rates, prices have to go down. Something is going to crack,” Terry said on the podcast, Newsweek reported. “I think we’re going to have a black swan event (that) is coming here.” Probably in the next six to eight months. A kind of black swan.”
Terry pointed to the Fed and its efforts to bring down record levels of inflation as what could push the housing market toward a black swan or an unpredictable event with dire consequences beyond what would normally be expected but in hindsight seems obvious.
“I think they’re on this path to keep raising interest rates because they want the market to collapse. They want affordability,” Terry said of the Fed.
However, saying that the Fed wants to “collapse” is not entirely accurate. The Fed was trying to balance raising interest rates with steering the U.S. economy toward a “soft landing” — in other words, curbing inflation without causing a deep recession. Last year, Fed Chairman Jerome Powell also said that the US housing market would likely need to go through a “difficult correction” before achieving a “better balance” in prices and affordability.
The question now is whether the Fed can achieve a soft landing and correct housing prices without pushing the economy into a spiraling recession. After an unprecedented series of interest rate hikes, the national housing market did see a correction — but it was a divided correction, with some regional areas hit harder than others.
While local markets in the East have already begun to largely recover, the West has seen some of the most dramatic price declines, with once-boiling housing markets calculating that interest rates now hover above 7%, a far cry from Interest that reached 3% on some days during 2018. The pandemic housing rush in 2020, 2021, and 2022.
However, affordability remains a glaring issue, even in the West where prices have fallen. Terry noted that the nation’s housing affordability level is at its lowest level in years, pointing to the Federal Reserve Bank of Atlanta’s Homeownership Affordability Monitor, which recorded a low of 69.5 in June, lower than at its peak. Housing bubble in 2006.
There may be more pain to come. After pausing a series of interest rate hikes in June, the Fed announced in July that it would raise its benchmark lending rate by 0.25% from 5.24% to 5.5%, its highest level since 2001. Last month, Powell noted that the Fed may not be finished with rate hikes as interest rates continue to rise in broad swaths of the economy.
Terry believes a rate hike is imminent, plus he noted there is an upcoming election year that could also impact a “black swan event” that “will shake up the markets.”
It also harked back to the housing bubble that preceded the Great Recession of 2008 and the dozens of banks that went bankrupt amid the subprime mortgage crisis, fueled largely by risky lending and banking practices that fueled a glut in the housing market. Terry pointed to the bankruptcy of three banks in 2023, namely Silicon Valley Bank, Signature Bank, and First Republic. When measured by those banks’ total assets, adjusted for inflation, they were larger than the 25 banks that failed in 2008, the New York Times reported.
However, housing experts consistently say that a 2008-like collapse is not imminent, and that a nationwide housing shortage is what has kept home prices high, despite rising interest rates. Although higher rates have somewhat helped bring down prices in some areas, it is the limited availability of homes that is keeping demand high and thus putting pressure on prices.
That’s why, regardless of whether the economy continues its “soft landing” or enters a mild recession, the U.S. housing market is likely to remain flat, Fannie Mae economists recently wrote in a commentary. They continue to expect a slight decline in the first half of 2024.
The problem with the housing market is limited supply, which predated the pandemic when there was a shortage of about 4 million to 5 million housing units in 2019, Lawrence Yun, chief economist at the National Association of Realtors, told Newsweek.
“This was because population and job growth outpaced new home construction,” Yoon told Newsweek. “Then the shortage worsened during the first year of the coronavirus real estate boom, as many wanted to take advantage of historically low interest rates. The shortage was exacerbated when mortgage rates rose due to homeowners’ unwillingness to include and give up lower interest rates.
Newsweek reported that Yoon sees two future scenarios that depend on a variety of factors. There could be “some cooling off” in the economy which could lead to mortgage rates falling and more buyers entering the market. Home builders can also increase construction.
“House prices will not collapse in this scenario,” Yoon told Newsweek. “House price growth will depend on whether homebuilders can adequately supply the market.”
Another scenario is if the economic recession leads to job losses, thus forced home sales and lower consumer confidence, Yoon said. This would also lead to much lower interest rates, which would encourage working Americans to enter the market.
“This scenario could cause home prices to rise faster, especially if some wealthy people decide to reallocate investments from the stock market to real estate,” Yoon said. “We will not have a repeat of the housing market crash of 2008-2012. There are no risky mortgages that could fail and no combination of massive oversupply and overproduction of homes.
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