Real estate prices have been on fire for the past two years. After the shutdown and March 2020 stock market crash the Federal Reserve lowered interest rates to zero, an act that helped fuel investors into buying real estate at higher and higher prices. Inflation also made real estate a great place for people to put money to work. But the stock market also went up thanks to the lower rates and even people putting stimulus money to work on Robinhood, but now the stock market is falling in a bear market.
Does this mean that real estate is going to fall just as bad too?
Some people are thinking we are going to see a repeat of 2008 for real estate, but I am not one of those people.
I actually think real estate is going to do well as a long-term investment over the next several years, however the REIT stock sector has taken a hit recently, as you can see from the RWR ETF, which tracks it.
I have been bullish on this sector for over a year and it has been outperforming the S&P 500, as you can see from the relative strength plot on the bottom of this chart. However, it pulled back hard this month as what has been a drop in the markets led by the Nasdaq and speculative high valued stocks, became a more generalized sell-off.
That process, unfortunately has shown no sign of being over.
REIT’s typically track real estate prices, so the pullback in RWR does suggest that a slowdown in the real estate market across the county is going to come, if it is not already happening.
But that does not suggest a crash.
Let me tell you about a more reliable indicator for real estate.
There are futures contracts that people use to hedge their real estate investments in the real world, that do a good job of forecasting what the real estate market will do. These contracts are forecasting slightly higher prices into this Fall and then a slight dip in real estate prices in 2023.
Here are the contract prices for the coming months ahead of us.
These contracts are not very liquid so don’t pay attention to the zero print for August 2023.
What is important is the overall price trend and the contracts are predicting essentially a peak in national real estate prices this Fall and basically stagnate prices through next year. The weakest time is projected to be from August through May 2023.
It’s a slowdown, but not a 2008 style crash.
Falling real estate prices, even a slight decline in them, would imply a slow economy and possibly a recession, but not a major depression or crash style economy.
The stock market bear market may not come to a real end, though, until that soft recessionary trough next year.
Maybe we get a bottom in the coming weeks and a nice rally and higher low on that trough or maybe not and things just keep trending slowly down over the coming months even the rest of the year. There is no reason to be in a hurry to buy stocks now.
No one can predict the exact course the financial markets are going to take, but the real estate futures market is pricing a peak and then slight dip in real estate prices is coming.
It looks like a short lived recession is ahead of us that will end in the Spring of 2023.
Heck, we could be in a recession now as the definition of one is at least two negative GDP prints in a row and we got one in the first quarter this year.
The real problem with the stock market is simply the bubble valuations it reached at its most recent peak, much like what happened with the Nasdaq in the spring of 2000.
-Mike
