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In order to better try to predict what will happen to real estate prices in the near future, let’s have a look at some indicators that can give us a hint. First, let’s differentiate between lagging and leading indicators.
Lagging indicators include:
– Employment / Unemployment Rate
– Home Prices Index
– Corporate Profits
– Labor Cost per Unit of Output
– New Home Sales – Existing Home Sales
Leading indicators include:
1. Mortgage Rates
2. Building Permits
3. Housing Starts
4. Stock Indices (e.g., XHB homebuilders ETF)
5. Builders’ Confidence
6. Buyer Traffic Let’s deep into the leading indicators.
1. Mortgage Rates
30y rates have spiked from 3% to 6.45% in the last 2 years. This will make new real estate purchases more expensive, therefore demand will decline and prices will come under pressure. This takes usually one year to come into effect.
2. Building Permits
Permits to build new housing units have declined by 20% in the last two years. Another sign that real estate demand is sinking.
3. Housing Starts
US Housing starts have declined by 5.65% in the last two years. Current level is at 1.42M, down from the peak of 1.80M in April 2022. Less demand of real estate equals less housing starts.
4. Stock Indices
The stock market reflects the future expected value of a company. If the market thinks the value of home building companies will decline in a future, the price declines already now. The homebuilder ETF XHB has declined by 8% in the last two years.
5. Builders’ Confidence
The National Association of Home Builders’ Housing Market Index is a good measure of builder confidence. The index has declined 45% in the last two years.
6. Buyer Traffic
The NAHB prospective buyer traffic is a survey of homebuilders which responds to 4 key questions: traffic of prospective buyers, foot traffic of prospective buyers, internet lead traffic and sales contracts signed. The index has declined 58% in the last 2 years
Conclusion: All leading indicators indicate that real estate prices will continue to fall. However, if we look closely at the graphs, we can see that a possible floor has been reached in January 23.
