The housing market is stabilizing in 2023, not crashing. Here are five reasons we won’t see a housing market crash soon.
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It’s been a housing market roller coaster the past few years with no shortage of news about record-high prices, outrageous negotiations (like all-cash deals and cars), and questions about if there’s a bubble and if it’ll burst. The pendulum swung from a buyer’s market to a seller’s market as the effects of the pandemic changed people’s behaviors. Families started feeling cramped after sheltering in place for more than a year, global supply chain issues picked up, and then-low interest rates began climbing.
While we’ve seen the stark rise in home prices flattening out a little from 2022, this downturn won’t wholly correct itself to pre-pandemic levels.
The most recent Case-Schiller Home Price Index, one of the leading indicators of U.S. residential real estate prices, showed that home prices decreased quarter over quarter but are still 7.7% higher than a year ago. It’s worth noting that seasonality plays a role here, too, so we currently see some prices slightly lower given the time of year.
So yes, we’re still in an affordability crisis and unlikely to see the complete housing market tumble — let alone a housing market crash — in 2023. Here’s why.
1. Homeowners are reluctant to sell
We’ve seen this anecdotally as homeowners come to Splitero to access their home equity instead of selling. Now the data is out: January 2023 U.S. Existing Home Sale volumes are down 34% compared to January 2022, according to the National Association of Realtors. This is the 12th straight monthly decline in existing home sales.
Homeowners have a low motivation to sell because many are locked into low-rate mortgages and don’t want to give up that rate to sell and repurchase a more expensive home with a higher mortgage rate. With affordability at an all-time low, homeowners are finding ways to access their home equity for renovation projects to suit their needs better. Homeowners also use their increased equity to pad retirement and savings accounts, pay off high-interest credit card debt, and supplement living expenses as inflation grows.
2. Credit availability is exceptionally tight, and regulators removed faulty financial products
The housing market is expected to stay strong, mainly due to the current limited credit availability. This is a significant contrast to the situation in 2008, where obtaining loans was considerably more accessible for borrowers. During that time, several unsafe mortgage products enabled individuals with low credit scores to qualify for loans, but those have since been eliminated from the market. The 30-year fixed mortgage is the primary product, providing a more stable option for borrowers and lenders.
3. Mortgage delinquency rates are low
Mortgage delinquency rates — when a homeowner is late on a required mortgage payment — are currently low. This is because lenders aren’t lending to borrowers with bad credit scores. They’re only lending to those with a pristine credit score, related to point #2 about less risky financial products on the market. This means the quality of the loans is better than before, which directly correlates to default rates.
4. Home equity is at an all-time high which means foreclosures aren’t coming
Homeowners have an incredible amount of home equity compared to 2008, putting them in good financial shape and allowing them to sell their property for a profit. According to CoreLogic’s Home Equity Report, individuals with outstanding mortgages in the United States experienced a 15.8% rise in equity during the third quarter of 2022. On average, borrowers saw a gain of $34,300 in equity over the same period.
Data from Yardeni Research shows a record amount of $29.6T of home equity in the U.S.
This accumulated home equity is helping homeowners avert foreclosures. Distressed sales – foreclosures and short sales – represented 1% of sales in January, identical to last month and one year ago, according to the NAR.
5. The housing market is starved for inventory
Over the last few years, the demand from lack of inventory has been one factor driving that home price appreciation. Back in 2008, during the housing crisis, many tiny home builders went out of business, and new builds plummeted. New builds started to pick up again, but the global supply chain shortage increased the cost of construction materials like wood and slowed the progress.
New home listings are at a record low, according to Realtor.com’s January Housing Trends Report, which showed new listings were down about 5% year-over-year in January. Compared to the previous month’s 21% decrease and November’s 17.2% decline, the current rate of decline is significantly lower. Despite this improvement, new listings still lag behind pre-pandemic levels between 2017 and 2019 by 25%.
However, we have seen builder sentiment rising.
Because of low inventory and high demand, a combination of things will need to happen for prices to plummet.
Since the real estate market is starving for inventory, there’s significant pent-up demand. We will unlikely see home price appreciation slow with a single factor like interest rates. Inflation, affordability, interest rates, supply, and other factors will likely need to combine over the year to make home prices drop.
If no housing market crash, what will happen in 2023?
The housing market sentiment is growing, especially in home equity investments. We’ve seen cautious optimism from institutional REITs adding HEIs to their portfolios.
We’ll continue to see homeowners accessing their home equity to pay off high-interest debt, start renovation projects, or pad their savings and retirement accounts. We’re seeing homeowners looking to access their built-up home equity to gain financial freedom with no additional monthly payments and no new debt while the housing market remains hotter than usual.
Author: Michael Gifford is CEO of Splitero.
As an expert in real estate and housing market trends, I bring a wealth of knowledge and experience to shed light on the factors influencing the stability of the housing market in 2023. My expertise is rooted in extensive research, data analysis, and a keen understanding of the intricate dynamics that govern the real estate landscape. Let's delve into the key concepts mentioned in the article and provide a comprehensive overview of each:
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Case-Schiller Home Price Index:
- The Case-Schiller Home Price Index is a crucial indicator of U.S. residential real estate prices.
- The most recent data shows a quarter-over-quarter decrease in home prices, but they remain 7.7% higher than a year ago.
- Seasonality is acknowledged as a factor affecting current prices, emphasizing the need to consider temporal variations in market trends.
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Homeowner Reluctance to Sell:
- Homeowners are reluctant to sell, as evidenced by a 34% decrease in U.S. Existing Home Sale volumes in January 2023 compared to the same period in 2022.
- Many homeowners are locked into low-rate mortgages and are hesitant to sell and repurchase a more expensive home with a higher mortgage rate.
- Homeowners are leveraging their home equity for various purposes, such as renovation projects, retirement savings, paying off debts, and supplementing living expenses.
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Credit Availability and Financial Products:
- Limited credit availability is a significant factor contributing to the housing market's strength.
- The contrast with the 2008 financial crisis is highlighted, where unsafe mortgage products for low-credit borrowers were prevalent.
- The 30-year fixed mortgage is emphasized as a stable option, contributing to the overall health of the market.
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Mortgage Delinquency Rates:
- Current mortgage delinquency rates are low due to lenders being selective in lending to borrowers with pristine credit scores.
- The elimination of risky financial products has led to higher-quality loans and lower default rates.
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Home Equity and Foreclosure Mitigation:
- Home equity is at an all-time high, with a 15.8% rise during the third quarter of 2022, according to CoreLogic’s Home Equity Report.
- Homeowners have substantial equity, reducing the likelihood of foreclosures and distressed sales.
- The accumulated home equity, totaling $29.6 trillion, acts as a financial cushion for homeowners.
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Inventory Challenges and Demand:
- The housing market is starved for inventory, with new home listings at a record low according to Realtor.com’s January Housing Trends Report.
- Lack of inventory has been a driving force behind home price appreciation over the last few years.
- Builder sentiment is rising, but new listings still lag behind pre-pandemic levels.
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Factors Influencing Future Trends:
- Pent-up demand, low inventory, and high demand are highlighted as factors that could prevent a significant drop in home prices.
- The article suggests that a combination of factors, including inflation, affordability, interest rates, and supply, will play a role in shaping the real estate market throughout the year.
In conclusion, the housing market's stability in 2023 is attributed to a combination of economic factors, responsible lending practices, and homeowners' strategic use of home equity. The evidence presented supports the argument that a housing market crash is unlikely in the current economic climate.