After a record-breaking run that saw mortgage rates plunge to all-time lows and home prices soar to new highs, the U.S. housing market finally is slowing. While demand and price gains are cooling, any correction is likely to be a modest one, housing economists and analysts say. No one expects price drops on the scale of the declines experienced during the Great Recession.
Rob Dietz, chief economist at the National Association of Home Builders, sums up the consensus among housing experts: “We’re thinking this is going to be a moderate downturn,” he says.
The real estate party raged on longer than anyone expected. The National Association of Realtors reported that median prices in the spring of 2022 topped $400,000 for the first time ever. Prices are up a whopping 39 percent since the coronavirus pandemic began in March 2020, according to NAR data.
Now, bidding wars have largely faded, inventories have loosened and the feeling of frothiness is gone. “The market is clearly turning,” says NAR chief economist Lawrence Yun.
Is the housing market going to crash?
The last time the U.S. housing market looked so frothy was back in 2005 to 2007. Then 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 housing boom is threatened by soaring mortgage rates and a potential recession, buyers and homeowners are asking a familiar question: Is the housing market so hot that it’s about to crash?
Housing economists agree that prices could fall, but the decline won’t be as severe as the one homeowners 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 equity and a fixed-rate mortgage locked in at a rate well below 5 percent. So no foreclosure crisis looms.
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,” he says. “[But] with the supply not being there, the repeat of a 30 percent price decline is highly, highly unlikely.”
Key housing market statistics
- A total of 34,501 U.S. homes had foreclosure filings — default notices, scheduled auctions or bank repossessions — as of August 2022, according to ATTOM Data Solutions.
- Illinois had the highest foreclosure rate of any state in August, at one foreclosure filing for every 1,926 housing units, according to ATTOM. It was followed by Delaware, where one in every 2,387 homes were in some stage of foreclosure.
- Lenders repossessed 3,938 U.S. properties through completed foreclosures — known as “real estate owned,” or REO — in August 2022. Illinois had the most REOs at 493, followed by New York’s 337, according to ATTOM.
- Home sales fell 19.9 percent from August 2021 to August 2022, the National Association of Realtors says. The median house price in August 2022 was $389,500.
- Homes’ rate of appreciation, per NAR, was 7.7 percent from August 2021 to August 2022.
Existing home prices
For months, housing economists have been predicting that the housing market would eventually cool as home values become a victim of their own success. Home prices have risen far more quickly than incomes, creating an affordability squeeze, and mortgage rates have doubled since August 2021.
Experts say home prices could fall
“Most markets are going to experience price declines in the high single digits,” Dietz predicts. Home price declines of 8 to 9 percent would create some economic pain, to be sure. But this correction will be nothing like the utter collapse of property prices during the Great Recession, when some housing markets experienced a 50 percent cratering of values.
Rick Sharga, executive VP of market intelligence at ATTOM Data Solutions, expects declines of 5 percent. “It’s almost inevitable we’re going to see home prices drop,” he says.
Yun says high-priced regions such as California are most vulnerable to a downturn in prices. The Midwest, on the other hand, is unlikely to see a decline in home prices. Overall, he expects national prices to remain flat next year.
5 reasons the housing market is not about to crash
Housing economists point to five compelling reasons that no crash is imminent.
- Inventories are still very low: The National Association of Realtors says there was a 3.2-month supply of homes for sale in August. In February, that figure was as low as a tiny 2.0-month supply. This ongoing lack of inventory explains why many buyers still have little choice but to bid up prices. And it also indicates that the supply-and-demand equation simply won’t allow a price crash in the near future.
- Builders didn’t build quickly enough to meet demand: Homebuilders pulled way back after the last crash, and they never fully ramped up to pre-2007 levels. Now, there’s no way for them to buy land and win regulatory approvals quickly enough to quench demand. While they are building as much as they can, a repeat of the overbuilding of 15 years ago looks unlikely. “The fundamental reason for the run-up in price is heightened demand and a lack of supply,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “As builders bring more available homes to market, more homeowners decide to sell and prospective buyers get priced out of the market, supply and demand can come back into balance. It won’t happen overnight.”
- Demographic trends are creating new buyers: There’s strong demand for homes on many fronts. Many Americans who already owned homes decided during the pandemic that they needed bigger places, especially with the rise of working from home. Millennials are a huge group and in their prime buying years. And Hispanics are a young, growing demographic keen on homeownership.
- Lending standards remain strict: In 2007, “liar loans,” in which borrowers didn’t need to document their income, were common. Lenders offered mortgages to just about anyone, regardless of credit history or down payment size. Today, lenders impose tough standards on borrowers — and those who are getting a mortgage overwhelmingly have excellent credit. The typical credit score for mortgage borrowers in the third and fourth quarters of 2021 stood at a record high 786, the Federal Reserve Bank of New York says. “If lending standards loosen and we go back to the wild, wild west days of 2004-2006, then that is a whole different animal,” says McBride. “If we start to see prices being bid up by the artificial buying power of loose lending standards, that’s when we worry about a crash.”
- Foreclosure activity is muted: In the years after the housing crash, millions of foreclosures flooded the housing market, depressing prices. That’s not the case now. Most homeowners have a comfortable equity cushion in their homes. Lenders weren’t filing default notices during the height of the pandemic, pushing foreclosures to record lows in 2020.
All of that adds up to a consensus: Yes, home prices are pushing the bounds of affordability. But no, this boom shouldn’t end in bust.
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