The veteran strategist Chris Vermeulen warns that America’s real estate market could be heading for a significant correction.
Chris Vermeulen, chief market strategist at The Technical Traders, highlighted concerning indicators in the real estate sector, particularly as borrowing costs are expected to remain elevated for an extended period.
Construction starts for both single-family and multi-family homes have leveled off after a significant decline last year. This pattern resembles the one observed before the 2008 housing correction, Vermeulen noted.
He attributed the stabilization of construction activity to a surge in investment within the sector. However, he cautioned that real estate remains vulnerable, especially if mortgage rates stay high.
“To me, this is a sign that things are really breaking down, and this is just a bounce,” Vermeulen said, referring to the recent stabilization in construction activity.
“It’s the last spot right now,” he said, where “you can squeeze a little bit of profits out of these buildings.” With rising material and labor costs, Vermeulen added, “we see the financial sector and real-estate pricing really fall apart.”
Most single-family homes in the US are financed with a 30-year fixed mortgage, which provides some stability. However, higher rates could pose significant challenges for property owners needing to refinance sooner, particularly in the commercial sector. This year, $900 billion of commercial real estate debt is set to mature, according to Bloomberg data.
Ongoing interest rate pressures could lead to widespread distress in the market. Commercial real estate foreclosures surged 117% year-over-year in the first quarter alone, according to ATTOM data.
In residential real estate, Vermeulen does not foresee a crash akin to the 2008 bust. However, he warned that further weakening could trigger a panicked sell-off among investors who have been heavily investing in real estate companies and 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.”
For the past year, real estate veterans have been sounding the alarm about a potential correction in property prices, particularly in commercial real estate. Office values have plummeted since the COVID-19 pandemic, dropping 35% through late March. According to Fitch Ratings, the sector is likely to face further declines as remote work increases vacancies and property owners refinance debt at higher interest rates and lower property valuations.
