Bear markets, where values fall by 20% or more, are not as common in real estate as they are in the stock market. But after two years of record home price growth, concern is growing about the direction home prices are headed.
The Canadian housing market has already entered a correction, with prices down 5% from a year ago and sales returning to pre-pandemic levels. By some estimates, the Canadian real estate market could be heading into bearish territory by the end of the year, dropping as much as 25%.
Could the US market be next? Here’s a closer look at a bear real estate market and whether or not home prices are heading for the hills or continuing to climb.
The case of a bear market
Low supply and low interest rates have been two of the main factors behind the home buying frenzy we have experienced over the past few years. But supply and interest rates are changing rapidly. July 2022 saw a 30.7% increase in active listings over last year, which is record growth.
Mortgage rates are also significantly higher than a year ago, which means it is more expensive for buyers to buy a home today. Rising inventory and fewer buyers due to expensive housing pushing buyers out of the market could help tip the market into bearish territory. By June 2022, the number of home sales had declined for five consecutive months.
In July, 19.1% of sellers reduced their asking price, a huge jump from the previous year, which saw only 9.6% of all sellers reduce their price. Some markets are seeing a much higher share of listings and reduced prices. For example, three hot real estate markets in recent years — Phoenix; Austin, TX; and Las Vegas – saw 40% or more of all sellers cut their price in July, a difference of 27% to 31% from a year earlier.
The median sale price actually returned for the first time in years, rising from $450,000 to $449,000, a record in June 2022. This is an annual growth rate of 16.6% d year on year, but it’s always a sign that things could turn around.
The Case Against a Bearish Real Estate Market
While there are certainly signs that the market is changing, housing supply remains extremely limited, which will continue to weigh on the market. Active listings are still around 45% below 2017-2019 levels, with listings having a supply of around three months, well below the ideal range of five to six months.
Days on market, another good indicator of demand, is also still below average, with homes currently on the market an average of 35 days, 26 days less than pre-pandemic levels. Until rectified by significantly higher inventories and a significant drop in buying demand, both of these factors favor continued price growth – not a bear market.
Some real estate markets appear to be heading into bearish territory. Analysts have warned that some hot markets (like Austin, Las Vegas, and Phoenix) are very susceptible to a market correction or crash, and it looks like their predictions have come true. Higher supply levels in these markets and exuberant house price growth could send prices down 20% or more in the near future.
However, not all markets will feel the same pressure. Others appear to be showing healthy and stable demand with inventories still well below sustainable levels. Real estate investors or home buyers looking to buy right now should exercise caution in once-hot markets as prices may continue to fall. In markets that still look warm, buyers shouldn’t expect a big discount anytime soon.