If you think the real estate market is bad now, just wait. That is the argument from James Stack of InvesTech Research. Stack accurately called the last housing crisis and also forecast the slowdown in 2018. Now he is saying that 2019 is going to be the worst year for a long time. “Expect home sales to continue on a downward trend in the next 12-plus months. And there’s a significant downside risk to housing prices if a recession takes hold”, says Stack. He does admit that it is too hard to say if housing is currently in a bubble, but that prices are very likely to fall.
FINSUM: Mortgage rates have risen sharply and prices are quite elevated, so it is no wonder prices have fallen. However, real estate hasn’t seen the exuberance it did pre-Crisis, so we do not think this will be a meltdown by any means.
Real estate has been the metaphorical whipping boy of data releases this year. The market has been largely slumping for months, with home sales mostly slowing as rates rose. Now more data has been released, and despite generally bearish sentiment, the numbers still surprised to the downside. In the month of November, pending US home sales felling a whopping 7.7% from a year previously. To be clear, pending sales mean signed contracts to buy homes (closings are usually 45 days later), which mean they are a good leading indicator.
FINSUM: Is it any wonder that four rate hikes this year have hurt the housing market? The question is whether the same will happen to the economy and real estate is just showing the effects first.
Real estate has been weak for several months now. Even back in the summer when the economy and markets appeared to be humming along, real estate was one of the sore spots for investors and the Fed. Well, the state of the market is becoming more apparent as new numbers from November show that existing home sales feel 7% from last year. The drop is the largest year over year fall since May 2011. Sales have declined in every month in 2018 bar one.
FINSUM: The worsening real estate market is a bit of a conundrum given the state of the labor market. Leading indicator?
The Wall Street Journal says that wealthy New Yorkers are having a hard time believing that real estate prices are falling. After a decade long boom, they have difficulty believing home prices are actually dropping. Nonetheless, they are. Anecdotes abound, especially at the high end of the market, of residents losing millions even after ten-year holding periods. The big question home owners need to be asking themselves is whether New York is a bellwether of what is coming in US real estate, or whether it is just suffering from its own idiosyncratic problems.
FINSUM: In our view, this is mostly a unique-to-NYC problem. It is a combination of oversupply (from new builds), higher tax rates, lower demand from foreign buyers, and rising interest rates.
It would be easy to think that real estate is headed towards a buyer’s market. Inventory has been increasing, prices gains have slowed or disappeared, rates are rising, and prices are very high. However, despite all of this, many real estate experts think 2019 will still be a better year to be a seller than a buyer. The reason why is that inventory may only increase slightly, which will keep prices relatively high and not lead to massive price cuts like in the last housing downturn. A recession still looks a little way off, which could also insulate prices as the employment market stays tight.
FINSUM: We think the housing market is definitely going to see prices stay flat or fall next year, mostly because demand is falling as rates rise. However, we do agree that the bottom is not going to fall out by any means.
REITs are an interesting sector at the moment. The real estate sector is obviously past peak, and rates are rising, a double whammy for REITs. The initial reaction for many would be “stay away”, however, there is some value to be had. One interesting area is in regional mall REITs, which have actually outperformed the S&P 500 this year. There is a lot of variation in quality between different regional malls, however. In particular, the performance is bifurcating between the very best malls and the rest, with the former thriving, and the rest lagging.
FINSUM: The US has 1,000 malls and some estimates say there is only enough demand to solidly support around 300. The ones that stick around, particularly the top 20, will likely do very well.