tommy/Getty Images
America's property market is due for a correction.
That's according to Chris Vermeulen, a longtime strategist and the founder of The Technical Traders. He thinks real estate is on the verge of a steep price correction, and he's forecasting that both residential and commercial properties could soon experience a wave of distress, causing prices to plunge around 30% in both markets.
"People are going to have to start to sell their homes," Vermeulen told Business Insider in an interview this week. "What we're starting to see if people starting to realize they can't afford their mortgages, or they 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."
His forecast is among the more dire sounded by real estate commentators in recent months. Most observers expect home prices to stay elevated over the near- to medium-term, but the signs pointing to a big move down are beginning to add up, Vermeulen said, noting a weak backdrop for the US economy that could end up hitting consumers — and particularly, mortgage holders — hard.
Americans are already showing signs of weakness. Retail sales have been unexpectedly soft for the past two months, according to data from the Census Bureau, with purchases rising just 0.1% over May. That implies corporate profits are set to weaken, Vermeulen said, which could spark more layoffs or reduced hours for workers as businesses trim costs and try keep shareholders happy.
Layoffs began to surge at the start of the year, with job cut announcements rising 136% in January, according to the consultancy Challenger, Gray & Christmas. Unemployment could peak around 5%-6%, Vermeulen predicted, in-line with what other economists have forecast.
"We start to see a trickle-effect… People are starting to get laid off as unemployment rises. People have burned through their savings and inflation is crazy higher," he said. "Eventually, people aren't going to be able to pay their mortgages."
Most mortgages in the US are 30-year fixed rate, and many existing mortgages have been locked in at lower rates from several years ago. But Americans tend to "stretch themselves too thin" when purchasing their home, which means some borrowers could eventually buckle financially as unemployment ticks higher, Vermeulen said.
Residential foreclosures rose 3% in May, according to the data provider ATTOM. Failures could continue to climb for the next two or three years as Americans eventually become too financially burdened, Vermeulen predicted.
Meanwhile, the fallout in the commercial real estate sector could be more severes. The sector has over $900 billion in debt approaching maturity this year, Bloomberg reported, after which it will have to be refinanced at higher rates and with potentially lower property values.
Commercial foreclosures were 117% in March on an annualized basis.
The Fed will eventually pull back interest rates as the economy tips into a recession, Vermuelen predicted. However, banks, bearing huge losses in their mortgage and commercial real estate portfolios, will be more hesitant to lend, weighing on demand and causing real estate prices to plunge.
"It's possible we'll see a 50% [correction] in some spots, but I would say somewhere around a 30% correction in real estate," Vermeulen said of real estate investments.
Property prices could drop by around 30% across the entire residential and commercial property market, he added.
Those losses could take seven to 10 years to recover from, he said, 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. And usually, when an asset goes up that much that quickly, it usually comes back and pulls and corrects," Vermueule added. "It's going to be an incredible opportunity for people who can identify the bottom."
Still, most real estate veterans don't expect the residential housing market to crash. The US housing market is so short on inventory it could take at least three or four years for supply and demand to balance out, the National Association of Realtors previously said, and low supply will keep a floor underneath home prices for the foreseeable future.
