Any period of economic uncertainty can make a major financial decision, like buying a house, more stressful. Even times of economic confidence can seem like the perfect time for the bottom to fall out, and you don’t want your home to be collateral damage.
While the housing market on a national scale has seen prices decline in 2022 amid rising interest rates, experts are noting that a sudden and abrupt housing market crash is unlikely, based on current market conditions. Housing demand, housing supply, mortgage interest rates and unemployment all play a role in how the real estate market fares, and currently they indicate a period of decline in some markets and growth in others, but a decline in transactions overall – and certainly not significant decline as seen in the housing market crash of 2008-2009.
Here’s what you should know about the housing market now and the indicators that can show if we’re headed for a crash:
- Are we in a housing bubble?
- Prices can decline without a crash.
- What’s different from the 2008 housing market crash?
- How does a recession impact the housing market?
- What conditions could lead to a housing market crash?
Are We in a Housing Bubble?
In economics, a bubble is defined as a period of rapid market value growth of an asset – in this case, homes.
Considering the fast pace of the housing market that has lasted roughly the length of the COVID-19 pandemic, rapid market value growth accurately describes the housing market up until about midway through 2022. Home price growth was in the double digits year over year every month from August 2020 thru mid-July this year, based on home sale price data from Redfin.
Signs of a housing bubble may be waning now, however. Since summer, month-over-month prices have declined, though as of October home prices are still up 5% year over year, according to Redfin.
“Housing valuations across the board are above where they ultimately should be,” says Jason Pride, chief investment officer for private wealth at Glenmede, a wealth management firm headquartered in Philadelphia. “Does it mean there’s going to be a crash? A crash implies there’s going to be a sudden move (downward. In current conditions), we would expect a more gradual valuation adjustment, rather than a crash.”
The low supply of houses on the market, which has been a major cause of fast-rising home prices even before the pandemic, remains low as homebuilders back off plans for major development and home sellers pump the brakes as well – they’re choosing to stay in their current homes rather than take on a higher mortgage interest rate.
While mortgage rates are technically independent of the federal funds target rate set by the Federal Reserve, they often increase or decrease as a result of the Fed’s actions. The federal funds target rate has been raised repeatedly this year in a marked effort to curb inflation. The average 30-year, fixed-rate mortgage interest rate has reached over 7% in recent months, but as of Dec. 7 the average rate has dropped to 6.41%, according to the Mortgage Bankers Association.
“The Fed’s rate puts pressure on home prices. It reduces home affordability and makes it so the marginal buyers chooses not to make a purchase,” Pride says.
“What’s happening is that both buyers and sellers are backing off of this market, which means that there’s a lot fewer sales but prices have been pretty stable,” says Daryl Fairweather, chief economist for Redfin.
Prices Can Decline Without a Crash
The decrease in the number of home sales is stark. In October, there were nearly 30% fewer homes sold than in October 2021, according to Redfin.
But the ability for homeowners now to wait out economic uncertainty – and climbing interest rates – may be what keeps any drop in homes prices from becoming more concerning. “The lack of transactions is actually what keeps (prices) from declining faster,” Pride says.
Markets that experienced faster home price growth in recent years are more likely to see bigger dips as prices correct to fit with long-term demand, says Jarred Kessler, founder and CEO of EasyKnock, a company that provides an alternative to home equity loans. He expects to see the markets where prices shot up high and faster than others – such as Austin, Texas; Nashville, Tennessee; Miami; and Phoenix – as places more likely to see prices decline 10% or more.
“(Prices) moved up so much, and a lot of those places had a lot of institutional buyers, and they’ve pulled back now,” Kessler says. Real estate investors looking to make large-scale profit from buying single-family homes and flipping them, often referred to as iBuyers, in many of the most popular markets have slowed business or stopped altogether.
What’s Different From the 2008 Housing Market Crash?
Homeownership can feel scary during any point of economic uncertainty – especially if you have a vivid memory of the Great Recession and the housing market crash of 2008 and 2009. Predatory lending practices in the first years of the 21st century meant many homeowners faced foreclosure when adjustable interest rates rose, and unemployment further increased the number of properties in foreclosure.
“We had a surge in homeownership that was driven by a fairly aggressive home-lending cycle in the economy,” Pride says. “This time around the home-lending cycle has been more muted, and you could say demand might have been high due to lower interest rates, but it wasn’t due to overly easy lending.” Because housing demand was artificially propped up by issuing mortgages to people who weren’t in a good financial place to buy and maintain a home, economic downturn also meant buyer demand plummeted. Home values declined significantly as a result.
With today’s homeowners, laws and regulations have been in place to prevent predatory lending since the Great Recession. Even as high home prices and rising interest rates have increased the total cost to buy a home, making homeownership unaffordable for otherwise would-be homebuyers, there are still more qualified buyers searching for homes than there are properties for sale.
“There’s a push and pull going on in the real estate market as far as affordability: No one can afford it, but there’s also not enough houses to take care of demand,” says Clark Kendall, president and CEO of Kendall Capital, a wealth management firm in Rockville, Maryland.
How Does a Recession Typically Impact the Housing Market?
At least two consecutive quarters of negative GDP growth make a recession, and it’s typically accompanied by an increase in unemployment and decrease in consumption by the general public.
The financial strain individuals face during a recession leads to a slowdown in the housing market – homebuyers may pause their search if they’re worried about layoffs, and there may be a slight increase in foreclosure activity while higher unemployment increases the number of people who can’t pay their mortgage.
However, once activity on the housing market slows enough, mortgage interest rates drop to a point where buyers re-enter the market, interested in getting a good deal. Unlike in the Great Recession, an increase in housing market activity helps to bring the economy out of recession.
The first two quarters of 2022 experienced reported GDP decline – 1.9% in the first quarter, and 0.9% in the second – while the third quarter saw a 2.9% increase. Clark points out that a real recession requires additional economic slowdown beyond GDP. Unemployment is often a key indicator, and while the tech sector is experiencing layoffs, the national unemployment rate as of November 2022 remains low at 3.7%, according to the Bureau of Labor Statistics.
“We have not had as much of an economic slowdown as you’d expect when they raise interest rates as quickly as they have,” Kendall says.
He adds: “I don’t think the real estate market’s going to fall apart. If you ask me, I think it’s going to move sideways.” Sideways movement for a market occurs when a period of time passes where prices remain relatively stable without a significant trend up or down.
What Conditions Could Lead to a Housing Market Crash or Housing Bubble Burst?
While current conditions don’t point to a housing market crash, there’s no crystal ball to guarantee how the economy will fare in the next few months or years.
A few factors that could make the housing market more unstable include:
- Unemployment. A slight increase in unemployment would be OK, but a bottom fallout could be an indication of danger for the housing market. If too many people are without work, then distressed home sales climb and foreclosures become more likely.
- Homebuilding. Builders have been plagued with labor shortages for a decade, and the availability and cost of materials have been an ongoing issue since the start of the pandemic. With even a moderate slowdown in buyer activity, homebuilders are getting nervous and there are fewer permits for new housing construction. That can prolong the housing shortage, drawing out the demand-supply imbalance, Pride says.
- Buyer demand. Housing markets have cooled slightly, but demand hasn’t disappeared, and in many places remains strong largely due to the shortage of homes on the market. If buyer demand completely disappears, it would be a sign of a problem.
- Homebuyer motivation. For the typical homebuyer, now is not the time to buy real estate with the expectation of seeing value double in a short period of time. Kessler advises buying with the plan to live there for at least five years. “If you can afford to live there, don’t worry about the noise between now and then,” Kessler says.