This Housing Correction Could Last Years

Summary of “This Housing Correction Could Last Years”

Presenter: Dave Meyer (On the Market)

---

Key Topics Covered

• Definition and distinction between a housing correction and a crash
• Current state of the U.S. housing market with regional and price-tier breakdowns
• Macroeconomic context: inflation, mortgage rates, affordability, business cycle phases
• Investment strategies and risk management during a correction
• Outlook on duration of the correction and future price expectations

---

Finance-Specific Content

1. Correction vs. Crash in Housing Market

• Crash: Rapid, widespread price declines of at least 10-15% nominally within a short period (e.g., 2008-2009 crash saw ~20% drop).
• Correction: Slower, modest price declines or flat growth, typically 3-10% over several quarters or years, representing normalization after overvaluation.
• Housing market crashes are rare; only one major crash in 100+ years (2006-2009).
• Current market is in a correction, a normal business cycle phase following a peak.

2. Current Market Data and Regional Trends

• Nominal home prices (not inflation-adjusted) are slightly up (~1.7-2% YTD), per Case-Shiller, Redfin; Zillow shows near flat.
• Real home prices (inflation-adjusted) are down approximately 1% due to inflation (~3% inflation rate).
• Widespread cooling in almost all regions:
  • Strongest markets (Midwest, Northeast: Detroit, Milwaukee, Rochester, Hartford) still show modest positive nominal growth (~3-4%), but real returns are near zero or slightly positive (~1%).
  • Major markets in Florida, Texas, California, Arizona, Colorado, Washington, Oregon are flat or negative nominally.
• Price tier breakdown:
  • Upper-priced homes: nominal growth slowed from 5% to 6% year-over-year.
  • Mid-priced homes: down from 4.7% to 2%.
  • Low-priced homes: declined from 4.5% to negative 1%.

3. Macroeconomic Context

• Mortgage rates remain elevated (~6.35%), down from ~7.15% at start of year, but still high enough to limit affordability.
• Affordability is at a 40-year low, driving the correction.
• Business cycle phases explained: Expansion → Peak → Correction → Bottom.
• Correction’s role: restore affordability through price declines, wage growth, or mortgage rate reductions.
• Inventory is rising (~20-25% year-over-year increase in active listings; 8-10% increase in new listings), but no flood of inventory or forced selling.
• Foreclosures and delinquencies remain low; slight upticks in FHA and VA loans (15% of market), but no systemic risk.
• Sellers are reluctant to list properties amid falling prices, which limits inventory growth and supports market stability.

4. Risk Management and Investment Strategy

• Assume flat nominal home price appreciation and flat rent growth for 2025 and near term.
• Focus on precision in acquisitions: buy only the best deals in great locations at great prices.
• Prioritize assets that cash flow well to hold through the correction.
• Increased inventory means more choice and potentially better cash flow deals.
• Avoid panic selling; paper losses are normal in corrections and only realized upon sale.
• Hold quality assets to benefit from eventual market recovery.
• Expect a “Great Stall” lasting several years, with real home prices stagnant or declining before growth resumes.

5. Outlook and Timeline

• Real home prices peaked in 2022 (~38 months ago).
• Historical data suggests it can take 5-9 years or more for real home prices to recover after rapid appreciation periods like COVID.
• Mortgage rates likely to stay in the mid-to-high 6% range for at least 6 months, barring aggressive Fed intervention (e.g., buying mortgage-backed securities).
• Wages may rise, but uncertainty remains (e.g., impact of AI on jobs).
• Low probability of crash unless unemployment spikes or mortgage rates rise sharply again.
• Next episode will feature a panel with James Dard, Henry Washington, and Kathy Fecky to discuss tactical responses for buyers and sellers.

---

Explicit Recommendations & Cautions

• Do not panic; correction is normal and healthy for market.
• Prepare for flat or slightly declining real prices for the next few years.
• Be precise and patient with acquisitions; focus on deals that cash flow.
• Avoid selling quality assets out of fear of paper losses.
• Monitor mortgage rates, inflation, and unemployment as key risk factors.
• Understand nominal vs. real price dynamics for realistic investment expectations.

---

Disclaimers

This summary is not financial advice. The presenter shares personal views and data-driven probabilities. Market timing is difficult; scenarios could change with macroeconomic shifts. Individual investment decisions should consider personal circumstances and risk tolerance.

---

Presenter: Dave Meyer, On the Market