Is The Housing Market About To Crash? | Bankrate (2024)

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 is finally slowing. Home values might now have peaked — as of April 2023, home prices had declined year-over-year for three consecutive months, with February’s drop marking the first in nearly 11 years.

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. Even after the recent retreat, prices are up by more than $100,000 since the coronavirus pandemic began in March 2020, according to NAR data. Now, bidding wars have largely faded, inventories are loosening and the feeling of frothiness is gone.

So what’s next? In late May, Elon Musk — the multibillionaire founder of Tesla and owner of Twitter — tweeted this prediction: “Commercial real estate is melting down fast. Home values next.”

While all that might sound ominous, 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.

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 about to crash?

Housing economists agree that prices could fall further, 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 home 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.”

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 decreasing year-over-year in February for the first time in more than a decade, the median sale price of a single-family home showed a 1.7 percent yearly decline in April, per NAR.

Overall, though, home prices have risen far more quickly than incomes. That affordability squeeze is exacerbated by the fact that mortgage rates doubled since August 2021, before starting to retreat a bit.

Experts say prices could fall further

While the housing market is indeed cooling, this slowdown doesn’t look like most real estate downturns. Home sales have plunged, and inventories of homes for sale have fallen sharply, too. Homeowners who locked in 3 percent mortgage rates a couple years ago are declining to sell — and who can blame them, with current rates once again pushing 7 percent — so the supply of homes for sale is even tighter. As a result, 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.

In fact, prices are already starting to creep back up, albeit slowly: S&P CoreLogic’s most recentCase-Shiller U.S. National Home Price NSA Index revealed the second consecutive month of modest price increases after a seven-month run of declines.

Yun says high-priced regions such as California are most vulnerable to a downturn in prices. However, he says, “Even in markets with lower prices, primarily the expensive West region, multiple-offer situations have returned in the spring buying season following the calmer winter market.” Overall, he expects national prices to remain flat.

5 reasons the housing market is not about to crash

Housing economists point to five compelling reasons that no crash is imminent.

1. Inventories are still very low: The National Association of Realtors says there was a 2.9-month supply of homes for sale in April. Back in early 2022, that figure was a tiny 1.7-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.
2. 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.”
3. 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.
4. 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 median credit score for mortgage borrowers in the the first quarter of 2023 was a high 765, 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.”
5. 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 still pushing the bounds of affordability. But no, this boom shouldn’t end in bust.

FAQs

• Actually, economists do not think it will. Housing economists point to five main reasons that the market will not crash anytime soon: low inventory, lack of new-construction housing, large amounts of new buyers, strict lending standards and a drop in foreclosures.

• After rising sharply for years, home prices decreased year-over-year in February 2023 for the first time in more than a decade — and continued to drop in March and April. The decrease is relatively modest, though: While the heated market has cooled down, it’s not likely to experience a sharp drop. Greg McBride, CFA, Bankrate’s chief financial analyst, says a plateauing of prices is more likely than a steep fall. Matthew Pointon, senior property economist at Capital Economics, also expects a slowdown rather than a freefall, predicting a 5 percent drop by mid-2023.

• It depends on many factors, including how much money you earn versus how much you pay out in debts and expenses each month — known as a debt-to-income ratio. Many financial advisors recommend the 28/36 percent rule of home affordability, which states that you should spend no more than 28 percent of your gross monthly income on housing expenses, and no more than 36 percent on total debt. Bankrate’s home affordability calculator can help you crunch the numbers.

• Different minimum credit scores are required by lenders for different types of mortgages. However, a score of at least 620 is typically required for a conventional loan — and if it’s as high as 740, all the better. Successful borrowers today tend to have outstanding credit, with a median score of 765.