Downward angle icon Downward angle icon. The US real estate market could soon undergo a major correction, according to strategist Chris Vermeulen. tommy/Getty Images Get ready for a sharp correction in residential and commercial building prices. That's the view of strategist Chris Vermeulen, who sees a wave of a real estate crisis coming soon. As the economy slows and unemployment rises, foreclosures will rise, he said.
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. Vermeulen 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. “We're starting to see people realize they can't pay their mortgage or they're going to have to downgrade their homes. A lot of people are struggling financially, but 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 be made by real estate commentators in recent months. While most observers expect home prices to remain elevated in the short to medium term, signs pointing to a bigger drop are starting to pile up, Vermeulen said, noting 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. That means corporate profits will weaken, Vermeulen said, and could lead to more layoffs and cuts to employee 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 predicted the unemployment rate could peak at 5% to 6%, in line with predictions by other economists.
“We're starting to see the trickle effect… unemployment is rising, people are starting to get laid off, people are using up their savings, inflation is going crazy,” he said. “Eventually, people are not going to 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 a few years ago. But Americans tend to “overstretch” when buying a home, and as unemployment rises, some borrowers will ultimately find themselves financially insolvent, Vermeulen said.
Home foreclosures rose 3% in May, according to data provider ATTOM. Vermeulen predicted that foreclosures could continue to rise for the next two to three years as Americans finally feel overburdened financially.
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, according to a Bloomberg report.
Commercial property foreclosures in March were up 117% on an annualized basis.
Vermeulen predicted that the Fed would eventually cut interest rates as the economy slumped into recession, but 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.
“50% [correction] “In terms of real estate investment, we are seeing some declines, but in real estate we're going to see a decline of around 30%,” Vermeulen said.
He added that property prices across the residential and commercial real estate markets could fall by around 30%.
He said 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 in the last couple of years, which is pretty rapid. Usually when assets rise that quickly, they come back down and correct,” Vermeule added. “This could be a great 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 low on inventory and it could take at least three to four years for supply and demand to balance out, meaning a lack of supply will keep home prices down for the time being.