Is the housing market headed for a crash?
Much to the chagrin of would-be homebuyers, property prices just keep rising. It seems nothing — not even the highest mortgage rates in nearly 23 years — can stop the continued climb of home prices.
Prices increased once again in December, according to the National Association of Realtors (NAR), which reports that median existing-home prices were up 4.4% over last year — the sixth month in a row of year-over-year jumps. In another reflection of ongoing increases, the latest S&P Core Logic Case-Shiller home price index showed a 4.8% jump in October that represented the ninth month in a row of gains.
So much for the idea that a “housing recession” would reverse some of the outsized price gains in homes. The U.S. housing market had finally started slowing in late 2022, and home prices seemed poised for a correction. But a strange thing happened on the way to the housing market crash: Home values started rising again.
NAR data shows that median sale prices of existing homes are near record highs. December 2023’s median of $382,600 is off the all-time-high of $413,800, but not by much, especially for a typically quiet time of year. (Seasonal fluctuations in home prices make June the highest-priced month of most years — the all-time high was reached in June 2022.) “The housing recession is essentially over,” says Lawrence Yun, NAR’s chief economist.
Home values held steady even as mortgage rates soared to 8% in October 2023, reaching their highest levels in more than 23 years. (They have since dipped back down, falling below 7% in recent weeks.) The main culprit is a lack of housing supply. Inventories remain frustratingly tight, with NAR’s December data showing only a 3.2-month supply.
“You’re not going to see house prices decline,” says Rick Arvielo, head of mortgage firm New American Funding. “There’s just not enough inventory.”
Skylar Olsen, chief economist at Zillow, agrees about the supply-and-demand imbalance. Her latest forecast says home prices will keep rising into 2024 — welcome news for sellers but not so great for firsttime buyers struggling to become homeowners. “We’re not in that space where things are suddenly going to be more affordable,” Olsen says.
In fact, the trend is quite the opposite. According to Realtor.com’s December 2023 Housing Market Trends Report, high mortgage rates have increased the monthly cost of financing the typical home (after a 20% down payment) by 6.1% since last year. That equates to $123 more in monthly payments than a buyer last December would have seen.
Falling rates
Mortgage rates fell sharply in late December, a move that boosted affordability. However, lower mortgage rates also are pulling more buyers into the market. “The potential for a decline in mortgage rates intersects with the prime homebuying time of the year — if you can find one to buy, that is,” says Greg McBride, Bankrate’s chief financial analyst.
Taking all this into account, housing economists and analysts agree that any market correction is likely to be a modest one. No one expects price drops on the scale of the declines experienced during the Great Recession.
Is the housing market going to crash?
No. There are still more buyers than sellers, and that means a meaningful price decline can’t happen: “There’s just generally not enough supply,” says Mark Fleming, chief economist at title insurer First American Financial Corporation. “There are more people than housing inventory. It’s Econ 101.”
Dave Liniger, the founder of real estate brokerage RE/MAX, says the sharp rise in mortgage rates has skewed the market. Many would-be buyers have been waiting for rates to drop — but if mortgage rates do decline, it could send new buyers flooding into the market, pushing up home prices.
“You’ve got an entire generation of pent-up demand,” Liniger says. “We’re in this fascinating position of tremendous demand and too little inventory. When interest rates do start to come down, it’ll be another boom-and-bust cycle.”
Back in 2005 to 2007, the U.S. housing market looked downright frothy before home values crashed, with disastrous consequences. When the real estate bubble burst, the global economy plunged into the deepest downturn since the Great Depression. Now that the recent housing boom has been threatened by skyrocketing mortgage rates and a potential recession — Bankrate’s most recent expert survey puts the odds at 45% — buyers and homeowners are asking, when will the housing market crash?
However, housing economists agree that it will not crash: While prices could fall, the decline will not be as severe as the one experienced during the Great Recession. One obvious difference between now and then is that homeowners’ personal balance sheets are much stronger today than they were 15 years ago. The typical homeowner with a mortgage has stellar credit, a ton of home equity and a fixed-rate mortgage locked in at a low rate — in fact, according to Realtor.com’s December report, twothirds of all current mortgages have rates below the 4% mark.
What’s more, builders remember the Great Recession all too well, and they’ve been cautious about their pace of construction. The result is an ongoing shortage of homes for sale. “We simply don’t have enough inventory,” Yun says. “Will some markets see a price decline? Yes. (But) with the supply not being there, the repeat of a 30% price decline is highly, highly unlikely.”
Existing home prices
Economists have long predicted that the housing market would eventually cool as home values become a victim of their own success. After posting the a year-over-year decrease in February 2023 for the first time in more than a decade, the median sale price of a single-family home is on the rise again, with a 4.4% annual gain in December, according to NAR. That represents the sixth month in a row of year-over-year increases.
Overall, home prices have risen far more quickly than incomes. That affordability squeeze is exacerbated by the fact that mortgage rates have more than doubled since August 2021.
Prices to hold strong
While the housing market is indeed cooling, this slowdown doesn’t look like most real estate downturns. Despite prices being high, the actual volume of home sales has plunged, and inventories of homes for sale have fallen sharply, too. Homeowners who locked in 3% mortgage rates a couple years ago are declining to sell — and who can blame them, with current rates more than double that? — so the supply of homes for sale is even tighter. As a result, the correction will be nothing like the utter collapse of property prices during the Great Recession, when some housing markets experienced a 50% cratering of values.
“We will not have a repeat of the 2008—2012 housing market crash,” Yun said in a statement last fall. “There are no risky subprime mortgages that could implode, nor the combination of a massive oversupply and overproduction of homes.”
Ken H. Johnson, a housing economist at Florida Atlantic University, says the housing market is being pulled in two competing directions. “I think we are in for a period of relatively flat housing price performance around the country as high mortgage rates put downward pressure on prices, while significant demand from household formation and an inventory shortage place upward pressure,” he says. “These forces, for now, should balance each other out.”