Home Market Analysis The Great Real Estate Tumble Of 2022

The Great Real Estate Tumble Of 2022

by WOOWinvest
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The Great Real Estate Tumble Of 2022


“A 1970s Type of Housing Market is Possible in Future”

We now have a “Triple Whammy” in 2022. In addition to the stock & bond market’s volatile woes, housing just delivered it’s worst two month hit since 2008 and wiped out over a year’s worth of gains.

The Winans Real Estate Index (WIREI)™ tracks US new home prices back to 1830. Based on the latest price data released by the US Bureau of Labor & Statistics, WIREI has posted a 16.3% decline since May’s record levels.

Chart 1: Winans Real Estate Index 2007-2022

While many people immediately think of the 2008 bubble when it comes to real estate bear markets, a better example is to compare today’s economic climate with the high inflation & rising interest rates of 1977-82. I remember this time painfully well. My father owned a residential construction company, and I worked in a large realty brokerage office during my first year in college. To say, “it was a challenging time in the real estate industry” is a mild understatement:

Chart 2: Winans Real Estate Index 1977-1982

What does history tell us to expect?

· A sideways housing market for years – as the chart above shows, prices declined 7% in the last half of 1979 and largely traded sideways until late 1982 as the Federal Reserve continued its war on high inflation with tight monetary policies.

· Continued material & labor shortages – taking on a “fixer upper” will be expensive and time consuming due to post Covid shortages and rising labor costs. A fully remodeled property will be easier to sell regardless of “location, location, location”.

· Tighter mortgage lending – Since the pool of qualified buyers will diminish due to higher borrowing costs & large down payments, sellers will have to “carry paper” and take a second position behind the mortgage for several years.

· Not a buyer’s or seller’s market – With wide spreads between bid & asking prices, sales volume will continue to slow until credit conditions improve.

· Higher investment taxes – Since higher down payments will be required to qualify for conventional mortgages, buyers should consider taking a loan from a 401k plan or borrow on margin from an investment account versus paying high investment related taxes from selling stocks.

Due to the loose monetary policies in place since 2009, we have had a heck of a bullish ride in housing with the Winans Real Estate Index gaining 104%!

However, all liquidity parties come to an end!

Since 1850, multi-year US housing bear markets occur 16% of the time, and while we hope this slowdown is short lived, the low mortgage rates of the last decade will not return in our lifetime

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