Bear markets, where values drop by 20% or more, aren't nearly as common in real estate as they are in the stock market. But after two years of record home price growth, the concern is mounting over where home prices are heading.
The Canadian real estate market has already entered into a correction, with prices down 5% from one year ago and sales returning to pre-pandemic levels. Some estimations say the Canadian real estate market could head into bear territory by year's end, falling as much as 25%.
Could the U.S. market be next? Here's a closer look at a real estate bear market and whether or not home prices are headed for the hills or continuing to climb.
The case for a real estate bear market
Low supply and low interest rates were two of the biggest factors for the homebuying frenzy we've experienced over the past few years. But both supply and interest rates are quickly changing. July 2022 saw a 30.7% increase in active listings compared with last year, which is record growth.
Mortgage rates are also notably higher than they were a year ago, meaning it's more expensive for buyers to purchase a home today. Increased inventory and fewer buyers due to expensive housing pushing buyers out of the market could help teeter the market toward bear territory. As of June 2022, the number of home sales had declined for five straight months.
In July, 19.1% of sellers reduced their asking price -- a huge jump from the year prior, 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 red-hot housing markets over the past few years -- Phoenix; Austin, Texas; and Las Vegas -- have seen 40% or more of all sellers reduce their price in July, a 27% to 31% difference from the year prior.
The median sale price actually reverted for the first time in years, down to $449,000 from $450,000, a record high in June 2022. This is an annual growth rate of 16.6% year over year, but it's still a sign that things could be reverting.
The case against a real estate bear market
While there are certainly signs the market is shifting, there is still an extremely limited housing supply, which will continue to strain the market. Active listings still sit around 45% lower than 2017 to 2019 levels, with listings having around a three-month supply, well below the ideal range of five to six months.
Days on the market, another good indicator of demand, is also still lower than average, with homes being on the market 35 days on average right now, 26 days less than pre-pandemic levels. Until rectified by notably higher inventory and major decline in buying demand, these two factors favor continued price growth -- not a bear market.
Some real estate markets appear to be heading for bear territory. Analysts have been warning that certain red-hot markets (like Austin, Las Vegas, and Phoenix) were highly susceptible to a market correction or crash, and it seems their predictions were true. Higher levels of supply in these markets and exuberant home price growth could lead prices to fall 20% or more in the near future.
However, not all markets will feel the same pressure. Others seem to be showing healthy and stable demand with inventory still well below sustainable levels. Real estate investors or homebuyers who are looking to buy right now should tread cautiously in once-hot markets as prices could continue falling. In markets that still look hot, buyers shouldn't expect a big discount anytime soon.