The real estate market is cooling and there are big implications for investors

A hot housing market has priced many new buyers out. Before you make an offer on that suspiciously discounted house — think again; you might want to hold off.

The housing market is starting to cool, home construction stocks are selling off and real estate firms are laying off employees. This week, the 30-year mortgage rate rose above 6% — nearly doubling since the start of 2022, and there are implications for everyone…

Homebuyers get what they want…

Just not the way they wanted. Rising rates are at risk of slowing a decade-long housing bull market, and here are the signs:

• Home prices have fallen for six straight months, per the National Association of Realtors (CNBC).
• U.S. mortgage purchase applications are at the lowest level since 2018 — down 40% from their 2021 peak.

U.S. home inventory has been at an all-time low — with an estimated 3.8M shortage last year — but inventory is finally increasing. According to real estate and economics writer Bill McBride, slowing home prices tend to follow rising home inventory (The Atlantic).

2008 repeat? McBride, who called the housing bubble in 2006 — said today is nothing like then. Housing inventory during the 2008 crash was 5x higher than it was today.

Rising rates trump strong balance sheets

Home construction companies are at record earnings levels with strong balance sheets, but rising rates have driven a sell-off in the industry — sending the iShares U.S. Home Construction ETF (BATS:ITB) down 36% this year.

Per Evercore homebuilding analyst Stephen Kim, homebuilding stocks typically rise 100% in the following 12 months after hitting such low valuations (Barron’s).

• With interest rates climbing fast, it’s tough to see a 100% gain in the current environment.
• But that could change if the Fed began to lower rates — a scenario that’s far away.

To prepare for a downturn, real estate firms Compass and Redfin announced that they’re laying off 10% and 6% of employees, respectively.

Investors: Thinking of buying a property?

Might want to give it a couple of months. According to Bloomberg columnist Conor Sen, those looking to buy a house should wait. The market is slowing for the first time since the pandemic, and housing inventory will likely rise in the coming months.

Housing bull: The Chief Economist for the National Association of Realtors (MW) expects that home shortages will be an issue for several years, and home prices will likely remain high.

For everyone else: Renting is now cheaper than owning a home (Redfin data). Rising mortgage rates will also add more pressure on already-struggling consumers.