Downward angle icon Downward angle icon. iStock; Rebecca Zisser/BI Strategist Chris Vermeulen said the real estate market could soon experience a significant “downturn.” Signs of construction activity mirror the period leading up to the 2008 crash. “People don't realize that the real estate market is primed and ready for the next big downturn,” he said.
Veteran strategist Chris Vermeulen said the U.S. real estate market could be facing a major correction.
Technical Traders' chief market strategist said there were worrying signs in the property sector as borrowing costs are expected to remain high for a long period of time.
He said construction starts for single-family homes and apartment complexes are plateauing after a sharp decline last year, a trend he said is similar to that seen before the 2008 home price correction.
The stabilization in construction activity is likely due to the surge in investment that has hit the industry, Vermeulen said, but the real estate sector will still suffer, especially if mortgage rates remain high.
“To me, this is a sign that things are really getting worse and this is just a rebound,” Vermeulen said of the recent stabilization of construction activity.
“This is the last place you can squeeze a little bit of profit out of these buildings right now,” he said. “You're going to see material costs go up, labor costs go up, and you're going to see the financial sector and real estate prices really collapse.”
Most single-family homes in the U.S. are financed with 30-year fixed mortgages, but rising rates could pose problems for property owners who need to refinance sooner. That's also true for many commercial property owners, who have $900 billion in debt maturing this year, according to Bloomberg data.
Continued interest rate pressures could set off a wave of distress, Mr. Vermeulen said. Commercial property foreclosures rose 117% in the first quarter alone from the same period a year ago, according to ATTOM data.
As for residential real estate, Vermeulen said it's unlikely that home prices will crash like they did during the 2008 bubble burst. But a further drop could trigger panic selling pressure among investors who have put money into real estate companies and real estate ETFs.
“What people don't realize is that the real estate market is poised to experience another major downturn,” he said. “People are rushing to buy now because the downturn is continuing, but the reality is, I think we're going to see this collapse,” he said later.
Real estate veterans have been warning for the past year that real estate prices, especially commercial real estate, are due for a correction. Office prices have plummeted since the start of the COVID-19 pandemic, dropping 35% by late March. Fitch Ratings said the sector is likely to fall further as remote work drives up vacancy rates and property owners refinance debt amid rising interest rates and falling property valuations.
