A real estate developer is warning of a “Black Swan” event within the next calendar year due to the housing market’s present volatility.
Sean Terry, a former United States Marine and the founder of Flip2Freedom said that the combination of elevated housing prices and high interest rates might lead to the Federal Reserve advertently or not wanting the market to crash because it would lead to better future affordability.
In July, Federal Reserve Chairman Jerome Powell announced a .25 basis point rate increase from 5.25 percent to 5.5 percent—the most significant level in 22 years and the 11th hike of the past 12 U.S. central bank policy meetings, beginning in March 2022. The Fed has targeted bringing the current inflation rate of 3.18 percent down to 2 percent, with the possibility of additional interest rate hikes being announced later this month.
“How do you make housing affordable? If you have to raise interest rates,” Terry said on the Real Estate Disruptors podcast. “The prices have to come down. Something will crack, and I think…we’re gonna have a Black Swan event probably in the next six-eight months…that’s going to rock the markets.”
Black Swan events occur when circumstances may have been inevitable and unforeseen by various prognosticators, though in retrospect, signs of major catastrophes were evident all along.
Terry compared the current market to 2008, which preceded the Great Recession, and the major market crash that led to government bailouts of major banks. More banks could be consolidated by larger ones, he added, to bolster banks “too big to fail” and make them even bigger—including JPMorgan Chase.
Earlier this year, First Republic Bank was closed by regulators and sold to JPMorgan Chase after becoming the second-largest bank failure in U.S. history. The central bank failure was the third to occur in 2023, following the collapses of Silicon Valley Bank and Signature Bank.
Terry also compared the current market to 2006 and what led to that housing market crash.
In 2006, there was a 69-point spread between the Case-Shiller home price index and real disposable income, resulting in massive foreclosures and an economy gone awry. That bubble reformed in 2012.
“Look where we are at now: there’s a 136-point spread,” he said in a TikTok video. “We are in a massive bubble, and I believe it’s going to pop. It’s got to pop, and it’s coming soon, next 12 to 24 months.”
Newsweek reached out to Sean Terry via email for comment.
In August, the National Association of Realtors (NAR) reported a 2.2 percent decrease in home purchases in July attributed to “unfavorable” inventory availability and mortgage rates.
“Most homeowners continue to enjoy large wealth gains from recent years with little concern about home price declines,” NAR chief economist Lawrence Yun said. “However, many renters are concerned as they’re facing growing affordability challenges because of high interest rates.”
Yun told Newsweek on Monday that the current housing market problem is limited supply, and it began pre-pandemic when there was a shortage of approximately 4 to 5 million housing units in America in 2019.
“That came about due to population and job growth that outpaced new-home construction,” Yun said. “Then, the shortage worsened during the first year of the COVID-19 real estate boom as many desired to take advantage of the historically low interest rates. The shortage intensified when mortgage rates shot up due to homeowners who have been unwilling to list and give away their locked-in low rates.”
Yun sees two future scenarios playing out based on a variety of factors.
One is “some calming” in the economy and inflation that could lead to modestly lower mortgage rates and more buyers entering the market. It would also depend on homebuilders escalating construction, including repurposing empty commercial buildings into residential units.
“Home prices are not crashing in this scenario,” Yun said. “Home price growth will depend on whether homebuilders can bring sufficient supply to the market.”
The other scenario is if an economic recession leads to job losses and, in turn, forced selling of homes and less consumer confidence. That would also lead to much lower interest rates, and about 70 or 80 percent of Americans with stable employment potentially taking advantage of such rates.
“This scenario may cause home prices to rise faster, especially if some wealthy people decide to reallocate investments from the stock market to real estate,” he said. “We will not have a repeat of the 2008–2012 housing market crash. There are no risky subprime mortgages that could implode nor the combination of a massive oversupply and overproduction of homes.”
The next Federal Open Market Committee (FOMC) meeting takes place September 19-20.