The American real estate market is likely to undergo a correction.
That's the view of Chris Vermeulen, a longtime strategist and founder of The Technical Traders, who predicts that real estate is on the brink of a sharp correction, with both residential and commercial real estate likely to soon see a sell-off that could see prices fall by around 30% in both markets.
“People are going to have to sell their homes,” Vermeulen told Business Insider in an interview this week. “You're seeing people realizing they can't pay their mortgage or they're going to have to downgrade their home. A lot of people are struggling financially, and this is just the tip of the iceberg. Wait another two or three years and the real estate market will be hit the hardest.”
His forecast is one of the most pessimistic to have been made by real estate commentators in recent months. While most observers expect home prices to remain elevated in the short to medium term, Vermeulen said signs are starting to pile up pointing to a bigger sell-off, and he noted that the weak U.S. economy could deal a big blow to consumers, especially mortgage holders.
Americans are already showing signs of weakness: Retail sales have been unexpectedly weak over the past two months, with purchases up just 0.1% compared to May, according to Census Bureau data. Vermeulen said corporate profits are expected to fall, which could lead to more layoffs and cuts to workers' hours as companies try to cut costs and satisfy shareholders.
Layoffs have surged since the start of the year, with announced cuts rising 136% in January, according to consultancy Challenger, Gray & Christmas. Vermeulen said the unemployment rate is likely to peak at around 5% to 6%, in line with other economists' predictions.
“As unemployment rises, people are starting to be laid off. People are using up their savings and inflation is skyrocketing,” he said, adding, “Eventually, people won't be able to pay their mortgages.”
Most U.S. mortgages have 30-year fixed rates, and many existing mortgages were locked in at low rates from several years ago. But Vermeulen said Americans tend to “overstretch” when buying a home, and as unemployment rises, some borrowers will eventually find themselves financially insolvent.
Home foreclosures rose 3% in May, according to data provider ATTOM. Vermeulen said foreclosures could continue to rise for the next two to three years as Americans end up shouldering a disproportionate financial burden.
The impact could be even more severe for the commercial real estate sector, which has more than $900 billion in debt maturing this year that will have to be refinanced at higher interest rates and could see property values fall, Bloomberg reported.
Commercial property foreclosures in March were up 117% on an annualized basis.
Vermeulen predicted the Fed would eventually cut interest rates as the economy slides into recession, but he said banks with huge losses on their mortgage and commercial real estate portfolios would be reluctant to lend, squeezing demand and causing property prices to plummet.
Vermeulen said he expected “a drop of around 30 percent in the property market,” although some areas were expecting a drop of 50 percent.
He added that property prices across the residential and commercial real estate markets could fall by around 30%.
He said that due to the long nature of real estate cycles, it could take seven to 10 years to recover from those losses.
“Property prices have doubled and tripled over the last few years, which is pretty rapid. Usually when assets rise that quickly, they come back down and correct,” Vermeulen added. “This could be a fantastic opportunity for those who can find the bottom.”
Still, many real estate veterans don't believe the housing market will collapse. The National Association of Realtors has previously said the U.S. housing market is short on inventory and it could take at least three to four years for supply and demand to balance, and that the lack of supply will keep home prices down for the time being.