The US real estate market is headed for a correction, strategist says

The stabilization of construction activity is likely due to a burst of investment that’s hit the sector, but real estate is still in trouble,especially if mortgage rates remain elevated, Vermeulen said

“To me, this is a sign that things are really breaking down, and this is just a bounce,” Vermeulen said of the recent stabilization in construction activity.

“It’s the last spot right now [where] you can squeeze a little bit of profits out of these buildings. Materials are up, labor [costs] are up … And then, we see the financial sector and real estate pricing really fall apart.”

While most single-family homes in the US are financed with a 30-year fixed mortgage, higher rates could pose a problem for property owners who need to refinance sooner. That’s the case for many commercial property owners, and the sector will see $900 billion of debt maturing this year, according to Bloomberg data.

Continued interest-rate pressure could bring on a wave of distress, Vermeulen speculated. Commercial real estate foreclosures jumped 117% year-over-year just in first quarter, according to data from ATTOM.

In residential real estate, it’s unlikely that home prices will crash the way they did during the 2008 bust, Vermuelen said. However, further weakening could spark a panicked sell-off among investors who have been putting cash to work in real estate companies and in things like real estate 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,” he later added.

Real estate veterans have warned of a correction in property prices for the last year, particularly in commercial real estate. Office values have plunged since the pandemic, dropping 35% through late March. The sector likely has more downside on the way as remote work drives vacancies up and property owners refinance debt at higher interest rates and lower property valuations, according to Fitch Ratings.