Is the housing market going to crash? What the experts are saying

Much to the chagrin of would-be homebuyers, property prices just keep rising. It seems nothing – not even the highest mortgage rates in nearly 23 years – can stop the continued climb of home prices.

Prices increased once again in July, according to the latest S&P CoreLogic Case-Shiller home price index, with 19 out of 20 markets measured showing month-over-month gains. In another reflection of ongoing increases, the National Association of Realtors (NAR) reports that median home prices as of August were up about 4% year-over-year, with July and August reflecting the highest median prices it has ever recorded for those months.

So much for the idea that a “housing recession” would reverse some of the outsized price gains in homes. The U.S. housing market had finally started slowing in late 2022, and home prices seemed poised for a correction. But a strange thing happened on the way to the housing crash: Home values started rising again.

NAR data shows that median sale prices of existing homes are near record highs. August 2023’s median of $407,100, near the all-time-high of $413,800, reflects only the fifth time ever that any monthly median has eclipsed the $400,000 mark since NAR began keeping records. “The housing recession is essentially over,” said Lawrence Yun, NAR’s chief economist.

Home values have held steady even as mortgage rates have soared toward 8%, reaching their highest levels in more than 20 years. The culprit is a lack of housing supply. Inventories remain frustratingly tight, with NAR’s August data showing only a 3.3-month supply.

“You’re not going to see house prices decline,” said Rick Arvielo, head of mortgage firm New American Funding. “There’s just not enough inventory.”

Skylar Olsen, chief economist at Zillow, agrees about the supply-and-demand imbalance. Her latest forecast says home prices will keep rising into 2024 – welcome news for sellers but not so great for first-time buyers struggling to become homeowners. “We’re not in that space where things are suddenly going to be more affordable,” Olsen says.

In fact, lately we’ve seen quite the opposite. According to Realtor.com’s September 2023 Housing Market Trends Report, high mortgage rates have increased the monthly cost of financing the typical home (after a 20% down payment) by 12.4% since last year. That equates to $256 more in monthly payments than a buyer last September would have seen. “Buyers still struggle with the triple threat of rising listing prices, record-high mortgage rates and limited inventory, making affordability a continued concern,” Realtor.com chief economist Danielle Hale said in a statement.

Taking all this into account, housing economists and analysts agree that any market correction is likely to be a modest one. No one expects price drops on the scale of the declines experienced during the Great Recession.

Is the housing market going to crash?

Back in 2005 to 2007, the U.S. housing market looked downright frothy before 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 recent housing boom has been threatened by skyrocketing mortgage rates and a potential recession – Bankrate’s most recent expert survey put the odds at 59% – buyers and homeowners are asking a familiar question: Is the housing market about to crash?

Housing economists agree that, while prices could fall, 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 below 5% – in fact, according to a recent Redfin study, 82.4% of all current homeowners are locked in below the 5% mark.

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 said. “Will some markets see a price decline? Yes. (But) with the supply not being there, the repeat of a 30% 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. But, 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 is on the rise again, with a 3.9% yearly gain in August, according to NAR.

Overall, home prices have risen far more quickly than incomes. That affordability squeeze is exacerbated by the fact that mortgage rates have more than doubled since August 2021.

Experts say prices to hold strong

While the housing market is indeed cooling, this slowdown doesn’t look like most real estate downturns. Despite prices being high, the actual volume of home sales has plunged, and inventories of homes for sale have fallen sharply, too. Homeowners who locked in 3% mortgage rates a couple years ago are declining to sell – and who can blame them, with current rates approaching 8%? – so the supply of homes for sale is even tighter. As a result, the correction will be nothing like the utter collapse of property prices during the Great Recession, when some housing markets experienced a 50% cratering of values.

“We will not have a repeat of the 2008–2012 housing market crash,” Yun said in a September statement. “There are no risky subprime mortgages that could implode, nor the combination of a massive oversupply and overproduction of homes.”

Yun says high-priced regions such as California are most vulnerable to a downturn in prices. In fact, that is already playing out in notoriously pricey Bay Area markets like Oakland, where the median sale price in August was down 7% year-over-year, and Berkeley, which saw a decline of more than 12%, according to Redfin data. Overall, Yun expects national prices to remain flat.

Ken H. Johnson, a housing economist at Florida Atlantic University, said the housing market is being pulled in two competing directions. “I think we are in for a period of relatively flat housing price performance around the country as high mortgage rates put downward pressure on prices, while significant demand from household formation and an inventory shortage place upward pressure,” Johnson said. “These forces, for now, should balance each other out.”

5 reasons there will be no housing market crash

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

–Inventories are still very low: The National Association of Realtors says there was a 3.3-month supply of homes for sale in August. 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.

–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,” said 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.”

–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 growing demographic also keen on homeownership.

–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 second quarter of 2023 was a stellar 769, 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.”

–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. And while there has been an uptick in foreclosures since then, it’s nothing like it was.

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

–When will the housing market crash?

Actually, most industry experts do not expect it to. 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 fewer foreclosures.

–Will housing prices drop in 2023?

Probably not – or at least, not by much. 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 for the next few months. The decrease was relatively modest, though, and prices have since risen, approaching record highs. The heated market may have cooled down, but 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. And Lawrence Yun, chief economist at the National Association of Realtors, agrees that prices overall will remain relatively flat.

–How much house can I afford?

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% rule of home affordability, which states that you should spend no more than 28% of your gross monthly income on housing expenses, and no more than 36% on total debt. Bankrate’s home affordability calculator can help you crunch the numbers.

–What is a good credit score to buy a house?

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. Generally, the higher your credit score the lower the interest rate you will qualify for. Successful borrowers today tend to have outstanding credit, with a very high median score of 769.