Real Estate Market on the Brink: Chris Vermeulen Predicts Major Downturn
The real estate market could soon see a major “leg down,” according to veteran strategist Chris Vermeulen. As the chief market strategist of The Technical Traders, Vermeulen has identified troubling signals in construction activity that mirror those preceding the 2008 housing crash. He believes the stabilization in construction starts for single- and multi-family homes, following a steep decline last year, is a concerning sign.
Signals from the Construction Sector
Construction starts have plateaued, a pattern similar to the one observed before the 2008 housing market correction. This apparent stabilization, Vermeulen suggests, might be misleading. He attributes it to a burst of investment in the sector rather than genuine market recovery. With borrowing costs poised to remain high, the real estate market is under significant pressure.
Rising Costs and Market Breakdown
Vermeulen points out that material and labor costs are climbing, further straining the real estate sector. He believes that the current stabilization in construction activity is merely a temporary bounce. “To me, this is a sign that things are really breaking down,” he said. “It’s the last spot right now where you can squeeze a little bit of profits out of these buildings.”
Commercial Real Estate at Risk
The commercial real estate sector is particularly vulnerable. Many commercial properties are financed with shorter-term loans, and $900 billion of debt is set to mature this year. Higher mortgage rates could lead to a wave of distress and foreclosures. According to data from ATTOM, commercial real estate foreclosures jumped 117% year-over-year in the first quarter.
Residential Market Outlook
While Vermeulen does not predict a crash in residential home prices akin to the 2008 bust, he warns of further weakening. This could trigger a panic sell-off among investors who have recently poured money into real estate companies and ETFs. “People don’t realize real estate is primed and ready for another major leg down,” he said. “They’re buying right now because there’s been a pullback, but the reality is that I think we’re going to see this collapse.”
Expert Warnings and Market Dynamics
Real estate veterans have been warning of a correction, especially in commercial real estate. Office values have plunged 35% since the COVID-19 pandemic, driven by increased vacancies due to remote work and refinancing challenges amid higher interest rates and lower property valuations.
Positive Signs in the Residential Market
Despite the gloomy outlook from Vermeulen, there are signs of life in the residential real estate market. According to Realtor.com, home prices rose by 1.4% year-over-year to $410,000 in January 2024. The number of homes listed jumped by 7.9%, with significant increases in cities like Denver, Seattle, and Miami. This rise in housing supply has shortened the time properties spend on the market, indicating renewed buyer interest.
Homebuyers’ Opportunities
Realtor.com identified 10 metropolitan areas where home prices have fallen, offering potential bargains for buyers. The increased inventory and slightly lower mortgage rates compared to their fall peak suggest a modest resurgence in the housing market. However, buyers still face higher costs compared to last year, with monthly payments for typical homes up by 5.4%.
Conclusion
While there are pockets of improvement in the residential market, Vermeulen’s warning highlights the potential risks ahead. The combination of high borrowing costs, rising material and labor expenses, and significant commercial debt maturing could lead to a major downturn in the real estate market. Investors and homebuyers need to stay vigilant and consider both the opportunities and risks in this volatile environment.