Are We Heading for a Housing Market Crash?

Various pundits and some media outlets have been predicting a potential crash in the U.S. housing market for several years now. These gloomy predictions have typically cited concerning economic indicators and market dynamics, including:

• Rising interest rates: the sharp increase in mortgage rates, which have reached levels not seen in decades.
• Market volatility: the housing market has shown more volatility, with fluctuations in home prices and sales volumes.
• Historical comparisons: some analysts compare current housing conditions to those leading up to the 2008 financial crisis.

Given the changing dynamics and other economic factors seen in the housing market over the past few years, are we heading for a housing market crash soon?

Let’s take a closer look.

The Housing Market Landscape

The housing market has certainly gone through some major changes over the past several years. We’ve seen significant shifts in mortgage rates, a rise in home prices, a decline in home affordability, and a slowing market in terms of transactions.

Home Prices

In 2020, the median new home price was $355,900. By July 2024, the median new home price had risen to $429,800.

This steady rise in home prices can be attributed to a variety of factors:

• The supply of homes has remained tight due to builders being cautious following the 2008 financial crisis.
• Certain regions have seen huge demand due to population shifts, especially during and after the pandemic. For instance, states like Florida and Texas saw large inflows of residents looking for more affordable housing or remote work opportunities.
• The overall economic recovery after the pandemic led to higher consumer confidence and spending power, which drove up demand for homes.

Mortgage Rates

Mortgage rates have been among the biggest factors influencing the housing market in recent years. As of September 2024, the average rate for a 30-year fixed mortgage was around 6.08%.

The rise in mortgage rates was influenced by the Federal Reserve’s monetary policies aimed at bringing down inflation, which directly impacted mortgage rates.

Though mortgage rates have begun coming down recently, this is still more than double those seen during 2020 and 2021, when rates dipped below 3%. This sharp increase has made borrowing more expensive overall for potential homebuyers.

Home Affordability

The combination of soaring home prices and elevated mortgage rates has led to a real decline in home affordability, which has affected first-time buyers especially hard.

Over the past five years, home prices have increased by approximately 50%, while household incomes have only grown by about 17%.

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The U.S. home price to median household income ratio now stands at an all-time high of 7.2 times, surpassing the previous peak of 7.1 times seen in 2022. It’s also higher than the ratio of 5.5 times before the pandemic and has essentially pushed many would-be buyers out of the market.

The median monthly housing payment is now $2,558. This amount has meant that many households have to allocate a larger portion of their income to housing costs, exceeding the common guideline that suggests households should not spend more than 28% of income on housing expenses.

This has led many potential buyers to opt for renting instead or even delaying their home purchases, which in turn has led to a slowdown in transaction volumes in many regions.

Market Activity

Overall, the housing market has shown signs of stagnation, with existing home sales declining to 3.86 million in August 2024. This is a big drop from the 5.64 million sales recorded in 2020, the highest level in 14 years.

In July 2024, pending home sales dropped by 5.5% from the previous month to their lowest level since the National Association of Realtors (NAR) began tracking this data in 2001.

This downturn raises concerns about the future of the housing market, since pending sales act as a leading indicator for existing home sales.

Although housing payments have become slightly more affordable due to recent drops in mortgage rates, pending home sales fell by 7.8% year over year, marking the largest decline in nearly a year.

Inventory remains tight, with the total number of homes for sale down 30% from pre-pandemic levels.

The Mortgage Bankers Association has also reported a significant decline in mortgage demand, reaching levels not seen in over 20 years. With household debt exceeding $17 trillion and inflation hovering above the Federal Reserve’s 2% target, many housing experts have raised concerns about affordability.

Another dynamic that has emerged is between existing homeowners and potential buyers. Many homeowners who secured low mortgage rates during the pandemic are reluctant to sell because selling would mean giving up their historically low rates.

This “lock-in effect” has reduced the number of homes available for sale and kept the inventory low.

On the flip side, many new buyers struggle to enter the market. Experts have projected that mortgage rates would need to drop to around 3.4% to restore affordability, though this target doesn’t look likely in the near term.

At the same time, the U.S. is facing a housing supply shortage. While the number of homes listed for sale increased by 17.7% in 2024 compared to the previous year at 1.8 million, this is still well below pre-pandemic levels.

Compare this with July 2019, when there were 2.4 million homes listed for sale.

The National Association of Home Builders projects that the pent-up demand for homes, estimated to range between 1.5 million and 7.2 million units, will not be addressed until 2030.

Are We Heading for a Crash?

All of this has led to questions of whether the U.S. housing market is heading for a crash.

While some experts have raised concerns, many analysts, including Len Kiefer, deputy chief economist at Freddie Mac, say that the current market dynamics don’t mirror the conditions that led to the massive housing bubble of 2008.

Differences from the 2008 Housing Bubble

During the pandemic, home prices surged primarily due to historically low mortgage rates and a major shift in housing demand as remote work became the norm.

Unlike the speculative price growth seen in the mid-2000s, which was fueled by easy credit and subprime lending, today’s price increases are largely driven by fundamental factors such as low inventory and increased demand.

The inventory of available homes remains tight, at about 4.2 months of supply at the current sales rate. This is a sharp contrast with the pre-2008 environment, where an oversupply of homes led to falling prices.

Millennials, now entering their prime homebuying years, are driving demand. According to Freddie Mac, 41% of millennials expect to purchase a home within the next two years, adding pressure to an already constrained market.

Another key difference is the tightening of lending standards since the 2008 crisis.

Today’s lending environment includes more stringent underwriting criteria. The average credit score for conventional mortgages today has risen to 740, compared to much lower averages during the housing bubble when subprime loans were rampant.

Fixed-rate mortgages are prevalent now, which means that most homeowners aren’t subject to payment shocks that can occur with adjustable-rate mortgages (ARMs). So even if interest rates rise, existing borrowers won’t face sudden increases in their monthly payments.

And despite concerns about potential declines in property values, the data shows that mass foreclosures are not likely.

In 2024, foreclosure rates remain relatively low, compared to the peak of 2.9 million foreclosures recorded in 2010 during the height of the financial crisis. According to various sources, including ATTOM’s U.S. foreclosure market report, the total number of foreclosure filings for 2023 was around 357,000.

In addition, many homeowners today have substantial equity in their properties. Nearly half of mortgaged homes are classified as “equity-rich,” which means that homeowners owe less than half of their property’s value. This is very different from 2009 when nearly 25% of homeowners were underwater on their mortgages.

According to CoreLogic, U.S. homeowners’ equity increased by 8% year over year in Q2 2024, totaling over $17.6 trillion in net homeowner equity.

As for interest rates, on September 18, 2024, the Federal Reserve announced a 0.50% interest rate cut, aimed at stimulating economic growth. This decision should lead to lower mortgage rates and provide some relief for homebuyers.

If the Fed continues on this path of further rate cuts, analysts predict that the average 30-year fixed mortgage rate could drop below 5% by 2025, which would further stimulate housing demand.

Looking Ahead

In terms of the larger economy, it doesn’t look like a looming recession is likely, though economic growth is expected to slow from 2.5% in 2023 to approximately 2.1% in 2024 and further to around 2% in 2025.

After a modest increase of 1.8% in 2023 and a significant rise of 5.8% year-over-year through May 2024, home prices are expected to stabilize as more properties become available and mortgage rates remain high.

From 2025 to 2029, home prices are projected to increase by about 17%, which is a more modest pace compared to the rapid appreciation seen since 2020. And as mortgage rates gradually decrease, existing home sales are expected to rebound.

Looking ahead, the U.S. housing market is expected to stabilize rather than crash. Although economic growth is projected to slow, a deep recession doesn’t appear likely.

Home prices, which saw a nice rise through 2024, are expected to grow at a slower pace over the next several years, aligning more closely with inflation.

While the U.S. housing market still faces some challenges such as high mortgage rates and low affordability, foreclosure rates remain low, inventory is tight, and demand has remained strong.

The more likely scenario is that the market is expected to gradually stabilize with modest price increases and even improved affordability over the coming years. Regional variations will play a role in shaping local market conditions, but a full-scale crash like 2008 doesn’t seem to be in the cards anytime soon.