Will the Housing Market Crash?
As more signs show that the housing market is already slowing down in 2022, many people are wondering: Will the housing market crash or collapse in the near future? More and more housing analysts are anticipating a more balanced housing market in the future, with annual appreciation slowing to single digits. Some housing markets are at risk of crashing or decline in home prices over the next 12 months.
The housing market is cooling as the economy is shrinking. The stock market is falling as inflation soars. Google trends include “Is the U.S. in a recession?” If the country isn't in a recession, it may be close. Will another downturn crash the housing market? As of August 2022, amid record inflation and higher interest rates, the forecasters still think that home price growth in 2022 will see a strong deceleration but the price would still not decline year-over-year.
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.
In 2022, most Americans don't want another 18 months of hardship. The housing market's recent pandemic boom, with skyrocketing prices, bidding wars, and an influx of investors, has parallels to that previous time. However, this time, the housing market won't crash or trigger a recession and may even assist the country's recovery. The majority of real estate professionals do not believe that the housing market of 2022 is in a bubble or poses a threat to the faltering economy.
This is despite the fact that home prices have risen by more than 31 percent nationally in only two years. The median list price figures on Realtor.com® are from June 2020 to June 2022. This time around, there are far more purchasers than available properties, the exact opposite of what occurred in the 2000s. The majority of bad mortgages have been eliminated. Lenders have significantly stricter requirements on borrowers.
However, this does not mean the economy is immune to the recession. Two consecutive quarters of negative U.S. gross domestic product, or GDP, often indicate an economic collapse. According to the U.S. Commerce Department, GDP decreased by 0.9% in the second quarter of the year, following a decline of 1.6% in the first quarter.
The unemployment rate remained extremely low in June, at only 3.6%. Despite the fact that more corporations are implementing hiring freezes and laying off staff, there are still a large number of organizations competing for personnel. If the country were in a recession, many more people would undoubtedly be unemployed, and companies would not be complaining about a lack of qualified applicants.
U.S. Federal Reserve Chair Jerome Powell has said the nation isn’t in a recession, a sentiment echoed by President Joe Biden.
“I do not think the U.S. is currently in a recession, and the reason is there are too many areas of the economy that are performing too well,” Powell said at a press conference on Wednesday.
According to Realtor.com, the housing shortage is simply too severe, with many more individuals trying to purchase and rent houses than there are available. In addition, the mortgage sector took action against loans that ballooned in size or were intended for borrowers to fail. And only purchasers with a consistent, verifiable income may qualify for mortgages.
The housing market was very different during the Great Recession In 2005 and 2006, 20% of mortgages went to persons who didn't meet regular lending conditions. They were called Subprime borrowers. Subprime lending has a higher risk, given the lower credit rating of borrowers. 75% of subprime loans were adjustable-rate mortgages with low initial rates and a scheduled reset after two to three years. Government promotion of homeownership prompted banks to slash rates and credit criteria, sparking a house-buying frenzy that drove the median home price up 55% from 2000 to 2007.
Nowadays, things are very different. Even if a recession occurs in 2022 or 2023, experts do not anticipate the widespread unemployment that characterized the Great Recession. They also anticipate that the recession will be quite brief. This means that there will be fewer homeowners unable to pay their mortgages. Those who are struggling may decide to sell their houses, maybe even at a profit, rather than allow them to be lost to foreclosures and short sales.
Without a lot of cheap homes flooding the housing market, home prices should remain strong to prevent any crash coming.
Many tapped-out homeowners are taking a step back as mortgage interest rates progressively rise into the 5%-plus range or close to 6%. Some no longer qualify for mortgages big enough to finance the purchase of the type of home they desire. Others cannot afford the increased rates and prices or do not wish to purchase at the housing market's peak. Some individuals 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. This should reintroduce buyers (who did not lose jobs) to the housing market. When home sales will increase, the economy as a whole will benefit. This is how the housing market can assist the nation in climbing out of a recession.
The National Bureau of Economic Research’s Business Cycle Dating Committee, and the eight economists who sit on it, are the official arbiter of whether the economy has entered into a recession. It has yet to make a determination.
“We’ll wait and see,” says Hale. Whatever happens, “I don’t expect another housing crash.” “In today’s housing market, we have a decade’s worth of underbuilding, which means there’s a lot more demand than supply,” says Hale. That imbalance should keep home prices stable. “It’s unlikely we will see big home price declines as we saw in the late 2000s.”
Millennial Housing Demand Will Keep The Market From Crashing
Millennials and Gen Z want more housing. As of July 2019, 166 million Americans aged Millennial or younger are potential homebuyers. According to the National Association of Realtors, first-time buyers were responsible for 30% of sales in June, up from 27% in May and down from 31% in June 2021. Most first-time buyers are younger than 40, indicating a broad buyer pool and robust demand, especially given low home inventories.
We won't see a decline since home inventory hasn't grown in 10 years. In a few years, Gen Z will be 30 and more financially competent to become homes than Millenials were at their age. This suggests house demand will remain strong, if not rise, while inventory lags. The extremely low supply is driving up home prices, which is another reason why housing experts believe the market will remain strong for years to come.
The economy affects housing supply and demand. If the economy is strong, more people will purchase and sell real estate. If the economy isn't functioning well, consumers have less income due to inflation. Their wages and weekly income aren't rising as fast. Supply and demand affect home values. Even if inflation is high, housing prices will decline due to oversupply.
For example, between 2006 and 2007, failure to make mortgage payments resulted in the foreclosure of millions of homeowners, resulting in a steep decline in house values, an increase in financial troubles, and, eventually, the bursting of the housing bubble. The ability to predict when the housing market would implode depends on a number of things. After all, is said and done, you must consider the following questions. Are homes still being sold in your neighborhood? Do prices fluctuate frequently? Are there numerous home foreclosures?
Buyers and investors in the housing market must be able to see through real estate agent hype and bluff. Answering these questions can help you understand how your local housing market is performing, but there is no specific formula for determining whether a housing crisis is near. If you are unsure of what you are witnessing in your particular market, an experienced local realtor will help put your queries in context.
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 for the next five years? Prior to 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.
Despite the fact that home prices continue to set records, a panel of housing specialists and economists polled by Zillow believes the market is not in a bubble. The most recent Zillow Home Price Expectations study interviewed more than 100 experts from academia, government, and the private sector about the status of the housing market and future growth, inflation estimates, and recession risks. Sixty percent of those polled do not believe the US housing market is now in a bubble, compared to 32 percent who say it is and 8 percent who are unsure.
Strong market fundamentals, including demographics, restricted inventory, and altering housing tastes, led respondents to reject the housing bubble argument. Sound loan underwriting and the majority of fixed-rate, fully amortized mortgages led to low credit risks. Another substantial minority opposed the word “bubble,” which suggests an imminent crash. Unaffordable prices in the absence of record-low mortgage rates are the main concern of housing bubble believers.
A hot market doesn't always indicate a bubble. Although a recession is imminent, today's housing market is very different from the mid-2000s. This market is supported by robust fundamentals and sound mortgages, aspects that won't alter soon. Therefore, most of the housing crash predictions show us that prices aren’t likely to drop in the near future.
Despite a more than 100-basis point increase in mortgage rates since the previous survey just three months ago and the potential for higher rates in coming months, the panel’s expectations for 2022 home price appreciation still rose to 9.3% from 9.0% last quarter. This would be a significant step down from the 19.6% appreciation observed over the 2021 calendar year, but still high above long-term historical averages.
Looking forward, the most optimistic quartile of respondents predicted prices would rise 46.1% between now and the end of 2026, while the most conservative quartile predicted a cumulative rise of only 9.3% in that time. On average, respondents are forecasting a 26.4% cumulative rise by the end of 2026.
The next 5 years will also see huge technological changes in the real estate sector, which could impact the demand and supply. The housing market is coming off a year in which home prices in the United States increased by an unsustainable 18.8%. Will the market continue to grow at this rate or will it be a little less frenetic this year?
An already challenging market with limited inventory and record price growth has become even more unfavorable for homebuyers as a result of an unprecedented interest rate increase. Even industry titans like Zillow decreased their bullishness in August, decreasing their projected home price growth rate for the next twelve months.
Zillow’s home value forecast expects a significant slowdown in annual home value growth – as measured by the raw Zillow Home Value Index from the current rate of 16% to 2.4% for the twelve months ending July 2023. This is a significant update from last month’s forecast of 6.9% appreciation through June 2023.
The national median home value declined 0.1% in July from June, the first monthly decline since 2012, and monthly growth has slowed since April's 1.9% high. In addition, Zillow's home value forecast now includes the percentage of for-sale listings that receive a price reduction. In recent months, this proportion has increased significantly as home sellers adjust their strategies in response to fluctuating market conditions. A weaker outlook for home sales is also a significant contributor to the reduced outlook for home value appreciation.
The forecast for 5,3 million existing home sales in 2022, which would represent a 14.1% decrease from 2021, also reflects recent market changes and continued weakness in the metric's leading indicators. In June, sales dropped more quickly than anticipated, and in July, pending home sales and mortgage applications were weaker than anticipated.
One of the most widely held housing market predictions for 2022 & 2023 is that inventory will remain scarce but price appreciation will be slower than it was in the last two years. While spring and summer will likely see an increase in listings, it is unlikely that there will be enough to meet demand. The housing market has been particularly robust in the pandemic, with high demand for homes in almost every region of the nation.
The cost of borrowing money through mortgages has been steadily increasing this year. Most experts predicted that mortgage rates would climb this year, but they did so more quickly than expected, averaging more than 4% for 30-year fixed-rate mortgages in mid-February. Around mid-April, it surged to 5.28 percent, the highest level since April 2010, and the uptick continues.
Monthly affordability will suffer as interest rates rise, but we'll also lose more of the investment-type buyers looking for once-in-a-lifetime leverage. As a result, rising interest rates may also imply a more stable market. With rates that low in 2021, all kinds of buyers rushed in, and with little housing supply to match, price rise has been ferocious.
This also emphasizes affordability. The basics of housing needs would still continue to drive primary purchases forward. It's a good thing that the housing market will be less heated in 2022 and 2023. Let's take a closer look at why the housing market is showing some signs of a slowdown in 2022 & beyond.
Fannie Mae's housing market forecast released in July 2022 is also less bullish due to “softening consumer spending.” As the year proceeds, the cumulative impacts of greater inflation and higher interest rates are anticipated to weigh more on economic growth and house sales. Significantly higher mortgage rates are now the key restriction on the housing market.
The ESR Group anticipates revised down its forecast for total home sales growth in 2022 to a decline of 15.6%, compared to a decline of 13.5% predicted the previous month. However, it adjusted upwards its home price appreciation forecast to 16% year-over-year in 2020 from the previously projected 10.8%.
The group stated that it “continues to anticipate strong deceleration in home price growth going forward due to the lagged effects of higher mortgage rates and the slowing economy weighing on purchase demand.”
With inflation running well above the target rate, the market's expectation of further, substantial monetary tightening has pushed interest rates even higher, and interest rate-sensitive industries, such as the housing market, are slowing in response. The prospective monthly payment on a typical new mortgage is climbing dramatically due to which both new and existing home sales, as well as construction, continue to remain sluggish.
The FMHPI is an indicator for typical house price inflation in the United States. It shows that home prices increased by 11.3 percent in 2020 and 15.9 percent in 2021, as a result of robust housing demand and record low mortgage rates. According to Freddie Mac's quarterly housing forecast released in July 2022, the total home sales are down 17% since the beginning of the year.
They expect housing demand to moderate and forecast home sales to slow to 6 million in 2022 and 5.4 million in 2023. They also forecast 30-year fixed rates to average 5% in 2022 and rise to 5.1% in 2023. House price appreciation is slowing to a more moderate growth rate and it is expected that price growth will be 12.8% and 4.0% in 2022 and 2023 respectively.
Freddie Mac anticipates home purchase mortgage originations to reach $2.0 trillion in 2022, followed by a decline to $1.9 trillion in 2023 as a result of house price growth and home sales forecasts. They predict that refinance originations will decline from $2.8 trillion in 2021 to $885 billion in 2022 and $450 billion in 2023 as a result of rising mortgage interest rates. From a peak of $4.8 trillion in 2021, they expect total originations to decline to $2.8 trillion in 2022 and $2.3 trillion in 2023.
Mark Zandi, the chief economist of Moody's Analytics, said he is concerned about a harsh landing in the housing market, but he believes the market and economy will not collapse as they did last time. He believes that for the 2023 housing market, home prices will level off, decreasing in certain sections of the country while rising somewhat in others. In comparison to the rise in 2022, this prediction for 2023 appears fairly reasonable.
CoreLogic HPI national change seen in July 2022 showed that home prices nationwide, including distressed sales, increased year over year by 15.8% as compared with July 2021. On a month-over-month basis, home prices declined by 0.3% in July 2022 compared with June 2022. The annual home price growth slowed for the third consecutive month in July but remained elevated.
The CoreLogic HPI Forecast shows that home prices will increase on a month-over-month basis by 0.3% from July 2022 to August 2022 and on a year-over-year basis by 3.8% from July 2022 to July 2023.
As intended, a slowing home price increase indicates the damping effect of rising mortgage rates and worries about a slowing economy on housing demand. As a result of a roughly 50 percent increase in monthly mortgage costs over the past several months, there are now fewer purchasers competing for a consistently constrained inventory.
And despite the fact that the yearly home price increase currently surpasses 15 percent (15.8% in July 2022), CoreLogic anticipates a dramatic decline over the next year. They are predicting positive, but moderating year-over-year percent changes, and forecasting a 3.8% by July 2023.
The normalization of overheated purchasing circumstances should lead to a greater equilibrium between buyers and sellers and a stronger housing market overall. Notably, home prices declined by 0.3% from June to July, a trend not seen between 2010 and 2019, when price increases averaged 0.5% between those two months.
No states posted an annual decline in home prices. The states with the highest increases year over year were Florida (29.6%), South Dakota (23.7%), and Tennessee (23.2%). These large cities continued to experience price increases in June, with Miami on top at 26.1% year over year.
No states posted an annual decline in home prices. The states with the highest increases year over year were Florida (31.8%), Tennessee (25.8%), and Arizona (24.9%). These large cities continued to experience price increases in July, with Phoenix on top at 27.1% year over year.
Top Markets at Risk of Home Price Crash
The CoreLogic Market Risk Indicator (MRI), a monthly update of the overall health of housing markets across the country, predicts that Bremerton-Silverdale, WA is at very high risk (70%-plus probability) of a decline in home prices over the next 12 months. Crestview-Fort Walton Beach-Destin, FL; Bellingham, WA; Reno, NV and Boise City, ID are also at very high risk for price declines.
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://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
- https://www.zillow.com/research/zillow-home-value-and-sales-forecast-august-2022-31346/
