The US housing market is going through a crucial period in 2023 with conflicting opinions on the future of the market. The housing market has been experiencing a period of significant growth in recent years, with record-low mortgage rates and high demand pushing home prices to all-time highs. However, concerns about a housing market crash have started to surface, with some experts sounding the alarm that the US housing market may be on the verge of a crash.
In this article, we will explore the current state of the housing market, analyze the factors that may contribute to a potential crash, and assess whether a market crash is likely to occur in the near future. Some housing analysts are anticipating a more balanced market with single-digit annual appreciation while others fear a housing market crash or collapse in the near future.
Will the Housing Market Crash?
Inflation is soaring, and there is a fear of an impending recession in the country. However, the majority of real estate professionals do not believe that the housing market is in a bubble or poses a threat to the faltering economy.
Housing caused the worst financial crisis in recent memory. When shoddy mortgages crumbled, the nation was left with foreclosures, numerous new houses remained empty, and millions of Americans were suddenly underwater. Throughout the preceding century, the housing market met considerable barriers, but none, with the exception of the Great Depression of 1929, led to the decrease in home values that happened during the Great Recession of 2007.
It is also important to note that not all economic downturns dampen the real estate market. Despite the economic downturn, the home market and demand remained robust during the 2001 recession. The housing market has been subjected to a number of severe hurdles during the course of the previous century; but, with the exception of 1929's Great Depression, none of these challenges have resulted in a decrease in house values comparable to that of 2007's Great Recession.
The housing market's recent pandemic boom with skyrocketing prices, bidding wars, and an influx of investors has parallels to the previous time. However, this time, the majority of real estate professionals believe that the housing market won't crash or trigger a recession and may even assist the country's recovery. The mortgage sector has taken action against loans that ballooned in size or were intended for borrowers to fail. Only purchasers with consistent, verifiable income may now qualify for mortgages.
This has resulted in a significantly lower risk compared to the Subprime lending during the Great Recession of 2005-2007. The majority of bad mortgages have been eliminated, and lenders have stricter requirements on borrowers. The housing shortage is too severe with many more individuals trying to purchase and rent houses than there are available.
Year-over-year home price growth decelerated in 2022 as mortgage rates rose and housing affordability declined. With mortgage rates continuing to remain high, home prices are predicted to decline in the near term. However, experts do not anticipate the widespread unemployment that characterized the Great Recession and also believe that the recession will be quite brief if it occurs. This means fewer homeowners will be unable to pay their mortgages and those who are struggling may decide to sell their homes at a profit.
Many tapped-out homeowners are stepping back as mortgage interest rates rise into the 6%+ range or close to 7%. Some no longer qualify for mortgages big enough to finance the home they desire, others cannot afford the increased rates and prices, and some are taking a wait-and-see strategy out of fear of a recession. As a result, fewer properties are selling, bidding wars are subsiding, and bids beyond the asking price are decreasing. Numerous house sellers have been compelled to reduce their asking prices.
In the event of a recession, mortgage rates are anticipated to decline, which should reintroduce buyers who did not lose their jobs to the housing market. This will increase home sales and benefit the economy as a whole. The housing market can assist the nation in climbing out of a recession.
While the US housing market is experiencing changes in 2023, most real estate professionals do not believe that it will crash or trigger a recession. The mortgage sector has taken action to prevent a repeat of the Great Recession, and the majority of bad mortgages have been eliminated. The housing shortage is too severe, and the majority of Americans are hoping to avoid another 18 months of hardship. The housing market may even assist the nation's recovery in the event of a recession by increasing home sales.
Millennial Housing Demand: A Buffer Against Housing Market Crash
The housing market crash is a concern for many potential home buyers and sellers. However, the increased demand for homes from the millennial generation may act as a buffer against a potential crash. Millennials and Gen Z want more housing. The housing market is one of the most important indicators of economic growth, and it has been showing some signs of instability in recent years. However, the increased demand for homes from the millennial generation may act as a buffer against the housing market crash.
According to the National Association of Realtors' 2022 Home Buyer and Seller Generational Trends report, millennials now make up the largest percentage of home buyers at 43%, with Generation X buying the most expensive homes at a median price of $320,000.
The report also found that most buyers purchased homes in suburban areas and small towns, dispelling the myth that younger generations are flocking to city centers. Millennials, in particular, are more likely to use the Internet to find a home they will ultimately purchase, and 92% of them use real estate agents to help find the right home and negotiate the terms of the transaction.
The trend of younger generations purchasing homes for the first time is also on the rise, with 81% of younger millennial home buyers purchasing a home for the first time, and just under half of older millennial buyers being first-time buyers. Additionally, the percentage of millennial sellers is on the rise, increasing from 22% to 26% over the past year.
Many factors can contribute to the decision to buy or sell a home, and for all home buyers under the age of 57, the main driver was the desire to own a home of their own. Among those 57 and older, the desire to be closer to friends and family was the top reason, followed by the desire for a smaller home.
While younger generations tended to move shorter distances when relocating, the overall buyers expected to live in their homes for 12 years, down from 15 years last year. For younger millennials and the silent generation, the expected duration was only 10 years, compared to 20 years for younger boomers.
However, debt continues to be a significant barrier for many attempting to buy a home, and both Generation X and younger boomers delayed purchasing a home for five years due to debt, the longest of all age groups. Younger millennials had the highest share of student debt at 45%, with a median amount of $28,000.
Despite these challenges, the increased demand for homes from the millennial generation provides a buffer against a housing market crash. This demand is expected to continue to grow as more of the millennial generation reaches the traditional first-time buyer age, and with this trend, the housing market may remain stable even in uncertain times.
When Will the Housing Market Crash?
The current state of the real estate housing market, which is currently adjusting to record-high inflation and higher interest rates, is giving real estate companies and experts a run for their money, as the continued pressure of these forces is causing difficulties for those who make future predictions. What are the housing market crash predictions? Before answering this question, it is crucial to comprehend what causes real estate markets to fall in the first place.
First, it is essential to recognize that housing markets do not suddenly crash. Multiple variables will exert pressure on a market over time, eventually leading to its collapse. When home values climb too rapidly, a housing bubble arises. When there's demand and the capacity to buy, it may increase. When there aren't enough houses for sale to match demand, competition drives up prices.
When a housing bubble expands and pressure builds, the housing market may crash. Interest rate hikes slow the economy. Demand and jobs might drop. Oversupply promotes a buyer's market and cheaper pricing. The real estate market might then fall or stall down. How can you know how awful and how fast it will go better? It depends on how sustainable development was before the slowdown and how serious the causes are.
Many concerns remain about the housing market. Critically, while one of the biggest drivers of home price growth has been the lack of supply, higher rates are holding back both potential sellers and new construction. As such, there is no relief in sight for an improvement in the housing supply and the sustainable housing market that would come with increased inventory.
As we enter summer 2023, many are wondering whether the housing market is headed for a crash. According to recent data from CoreLogic, the answer may be no, at least for the time being. While there are signs of a slowdown in the housing market's year-over-year growth rate, the overall data and forecasts suggest that a crash is unlikely in 2023.
Home prices continue to rise, albeit at a slower pace, and market indicators indicate a generally positive outlook. However, regional variations and factors like affordability, inventory shortages, and economic uncertainties should be closely monitored. As always, it is advisable for prospective buyers,
Home Price Trends
According to CoreLogic's Home Price Index (HPI), home prices nationwide, including distressed sales, experienced a year-over-year increase of 3.1% in March 2023 compared to March 2022. On a month-over-month basis, home prices rose by 1.6% in March 2023 compared to February 2023. These figures indicate a positive growth trend in the housing market, showcasing the continued appreciation of home prices.
Price Forecast
The CoreLogic HPI Forecast suggests that home prices will continue to rise. It predicts a month-over-month increase of 0.8% from March 2023 to April 2023 and a year-over-year increase of 4.6% from March 2023 to March 2024. These forecasts indicate a positive outlook for the housing market, projecting further growth in the coming months.
Slowing Year-Over-Year Growth
Although home price growth has been consistent, there is evidence of a slowdown. In March 2023, U.S. home price growth fell to 3.1%, the lowest rate since 2012. This decline can be attributed to various factors such as the lack of affordability, inventory shortages, and a slower demand for higher-priced homes compared to median-priced homes. Additionally, concerns regarding inflation, job gains, wage growth, potential recession, and elevated interest rates have made some potential homebuyers hesitant.
Expert Opinions
Selma Hepp, Chief Economist for CoreLogic HPI, highlights the mixed signals from housing markets across the country. While prices in many large metros have shown signs of improvement, the lack of inventory in this housing cycle and the influence of remote working conditions on home prices in certain areas have been noteworthy. Hepp suggests that housing markets will continue to experience declining growth over the spring and early summer before picking up later in 2023.
Regional Variances
The CoreLogic HPI reveals regional variations in home price growth. States such as Arizona, California, Colorado, Idaho, Montana, Nevada, New York, Oregon, Utah, and Washington experienced annual declines in home prices. On the other hand, Vermont, Indiana, and Florida saw the highest year-over-year increases in home prices, indicating diverse trends across different regions.
Where Can the Housing Market Crash in 2023?
The CoreLogic Market Risk Indicator (MRI) plays a crucial role in assessing the health and stability of housing markets across the country. By analyzing various factors and trends, the MRI provides insights into the likelihood of price declines in specific regions.
One area that stands out is Provo-Orem, UT, which has been identified as having a very high risk (70% probability) of a decline in home prices over the next 12 months. This indicates a significant concern for potential homeowners and sellers in this region. It suggests that market conditions in Provo-Orem are such that there is a higher likelihood of prices decreasing compared to other areas.
Boise City, ID; Lakeland-Winter Haven, FL; Salt Lake City, UT; and Ogden-Clearfield, UT are also identified as regions with a high risk for price declines. This means that these areas have exhibited certain characteristics or market conditions that make them vulnerable to potential decreases in home prices.
These market indicators underscore the importance of cautious observation in these regions. Homebuyers and sellers in Provo-Orem, Boise City, Lakeland-Winter Haven, Salt Lake City, and Ogden-Clearfield should closely monitor the market conditions and make informed decisions based on the available data and expert advice.
It's worth noting that the high risk does not necessarily mean that a crash in home prices is imminent. It signifies a higher probability of price declines relative to other regions. Market conditions can change, and external factors such as economic shifts or policy changes can influence the housing market dynamics. Therefore, ongoing monitoring and consultation with real estate professionals who are familiar with the local market are crucial for making informed decisions.
If you are considering buying or selling a home in these high-risk areas, it may be prudent to evaluate your financial situation, consider the potential impact of a price decline, and consult with experts who can provide guidance tailored to your specific circ*mstances. This approach will help you navigate the market more effectively and make informed decisions based on the current conditions and potential risks associated with these regions.
A Housing Crash Not Coming, but Reduced Demand for Homes
The housing market has been severely impacted by rising interest rates as reflected in the increase in mortgage rates since 2022. This has led to a reduction in housing affordability, which has resulted in fewer people applying for mortgages. The demand for new and existing homes has dropped, home builders are pulling back on construction, and house prices have fallen from their recent peaks. The Federal Reserve's efforts to control inflation have caused a significant decline in house price affordability.
Mortgage rates have been steadily climbing throughout 2022, with the rate on a 30-year mortgage averaging 6.36% in December, more than double the rate of 3.1% in December 2021. The typical monthly mortgage payment, based on the median home price and a 20% down payment, rose approximately 55% between the third quarter of 2021 and the third quarter of 2022. This has driven a collapse in demand to purchase homes. With mortgage rates exceeding 7% for the first time in two decades in October, and set to remain high, compared to 2021, the housing market will continue to face pressure due to affordability.
As demand has dried up, home sales have followed. Existing home sales are down nearly 34% compared with a year ago, while new home sales are down 15.3%. Falling sales have driven new home inventories up and now stand at 8.6 months' supply in September. This has led home builders to become bearish on the market. Both nationally, and for all four reported regions, the NAHB Builders Confidence Index has dropped well below 50.
The collapse in demand and sales is impacting home prices, which were down from summer peaks by over 1% nationally according to Moody's Analytics Home Price Index. The lower end of the market has been more resilient, barely falling since peaking over the summer compared to a decline of 1.6% for the top third of the market. Lower-priced homes are expected to perform better than higher-priced ones given the underlying demand from young adults and the dearth of supply of starter homes.
The Covid-19 pandemic altered consumer preferences for housing. Combined with historically low mortgage rates, buyers drove up house prices to record levels, leaving the market more than 25% overvalued relative to its long-run fundamental value. Based on Moody's Analytics estimates, the national housing market was more overvalued in Q2 2022 than it was during the 2006 Housing Bubble. These valuation levels are not sustainable. Prices are expected to continue to fall 5 to 10% from their recent peaks by the beginning of 2025. The most highly overvalued metro areas will see the largest declines, including Boise, Phoenix, Austin, and Nashville.
It is important to note that a 7.5% decline is only a correction and not a crash. House prices will not crate like they did during the Great Recession. We expect that the FHFA purchase-only HPI will fall back to late 2021 levels in early 2025. Only this year's gains will be wiped out by declines. In 2025, when the next low is reached, we expect prices to be nearly 30% higher than they were at the beginning of 2020.
The underlying need for housing remains strong given current demographics, with recent estimates of a 1.5 million unit housing deficit given expectations for household formations and current vacancy rates. Further, despite recent anecdotal evidence of demand destruction through multigenerational and roommate living arrangements, vacancy rates as of November still indicate that inventory is tight.
For sellers, this could mean a potential decrease in their property value, while buyers may find this a good time to enter the market, as lower prices may provide better affordability. However, buyers should still exercise caution and not rush into a purchase, as the housing market is unpredictable, and prices may continue to fall in the short term. They should also ensure they can comfortably afford their mortgage payments, especially with interest rates remaining high.
Homeowners who are looking to sell their homes may need to be patient and may have to price their homes lower than expected to attract buyers. They should also be prepared for a longer time on the market due to the current slowdown in demand.
Overall, the housing market's decline is not unexpected given the rise in interest rates and overvalued prices. The correction is necessary for the market to return to sustainable levels, and it is not a sign of a housing market crash. As the underlying need for housing remains strong, the market is likely to rebound in the long term, and prices are expected to rise again in the future.
Conclusion
In conclusion, while the housing market may be experiencing a slowdown in year-over-year growth, the data and forecasts do not suggest an imminent crash in 2023. Home prices continue to rise, albeit at a slower pace, and market indicators provide a generally positive outlook.
The US housing market is going through a crucial period in 2023 with conflicting opinions on the future of the market. Some analysts fear a housing market crash, while others anticipate a more balanced market with single-digit annual appreciation. Although the market is experiencing changes, most real estate professionals do not believe that it will crash or trigger a recession.
The mortgage sector has taken action to prevent a repeat of the Great Recession, and the majority of bad mortgages have been eliminated. The housing shortage is too severe, and the majority of Americans are hoping to avoid another 18 months of hardship. Housing demand from Millennials and Gen Z is also expected to remain strong. While there may be a decline in demand and the pandemic-induced housing boom may slow down somewhat, there are no signs of a housing market crashing again in 2023.
Sources:
- https://www.realtor.com/news/trends/recession-will-housing-market-survive/
- https://www.noradarealestate.com/blog/housing-market-predictions/
- https://www.corelogic.com/intelligence/u-s-home-price-insights/
- https://cre.moodysanalytics.com/insights/research/q42022-the-outlook-for-the-housing-market/
- https://www.forbes.com/advisor/mortgages/real-estate/will-housing-market-crash/
- https://www.zillow.com/research/zhpe-q2-2022-not-a-bubble-31093/
- https://www.freddiemac.com/research/forecast
- http://www.freddiemac.com/research/forecast/20210715_quarterly_economic_forecast.page
- https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index.aspx
