The real estate market faces a sharp correction with losses that could take a decade to recover from, strategist says.
America's property market is due for a correction, according to Chris Vermeulen, founder of The Technical Traders. Vermeulen forecasts a steep price correction in both residential and commercial properties, predicting prices could plunge about 30% in both markets.
"People are going to have to start selling their homes," Vermeulen told Business Insider. "What we're starting to see is people realizing they can't afford their mortgages or need to downgrade. A lot of people are struggling financially, and this is really the tip of the iceberg. Give it another two or three years — that's when the real-estate market gets hit the most."
Vermeulen's forecast is among the more dire sounded by real-estate commentators recently. While most observers expect home prices to stay elevated in the near to medium term, Vermeulen notes a weak backdrop for the US economy that could significantly impact consumers, especially mortgage holders.
Americans are already showing signs of weakness. Retail sales have been unexpectedly soft for the past two months, with purchases rising just 0.1% in May, according to Census Bureau data. Vermeulen believes this implies weakening corporate profits, potentially leading to more layoffs or reduced hours as businesses trim costs to satisfy shareholders.
Layoffs surged at the start of the year, with job-cut announcements rising 136% in January, according to Challenger, Gray & Christmas. Vermeulen predicts unemployment could peak around 5% to 6%, in line with other economists' forecasts.
"People are starting to get laid off as unemployment rises. People have burned through their savings, and inflation is much higher," Vermeulen said. "Eventually, people aren't going to be able to pay their mortgages."
Most US mortgages are 30-year fixed rates, with many locked in at lower rates from several years ago. However, Vermeulen cautions that Americans tend to "stretch themselves too thin" when purchasing homes, meaning some borrowers could eventually buckle financially as unemployment increases.
Residential foreclosures rose 3% in May, according to data provider ATTOM. Vermeulen expects foreclosures to continue climbing for the next two to three years as Americans become increasingly financially burdened.
The fallout in the commercial real estate sector could be more severe. Bloomberg reports the sector has over $900 billion in debt maturing this year, which will need refinancing at higher rates and potentially lower property values. Commercial foreclosures surged 117% in March on an annualized basis.
Vermeulen predicts the Fed will eventually lower interest rates as the economy tips into a recession. However, he expects banks to be more hesitant to lend due to significant losses in their mortgage and commercial real-estate portfolios, weighing on demand and causing real estate prices to plunge.
Vermeulen anticipates a 30% correction in real estate, though he notes some areas could see up to a 50% drop. He estimates it could take seven to ten years for the market to recover from these losses due to the long nature of real-estate cycles.
"The price of real estate has doubled or tripled in the last couple of years. It's pretty wild. Usually, when an asset goes up that much that quickly, it comes back and corrects," Vermeulen said. "It's going to be an incredible opportunity for those who can identify the bottom."
Despite Vermeulen's prediction, most real-estate veterans do not expect a crash in the residential housing market. The National Association of Realtors previously stated that the US housing market is so short on inventory that it could take at least three to four years for supply and demand to balance out, with low supply keeping a floor under home prices for the foreseeable future.
