Will the Housing Market Crash?
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. 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 believes 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 5%+ range or close to 6%. 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 Market Decline”
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.
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.
United States home prices nationwide, including distressed sales, increased year over year by 8.6% in November 2022 compared with November 2021. On a month-over-month basis, home prices declined by 0.2% in November 2022 compared with October 2022. The CoreLogic HPI Forecast indicates that home prices will decrease on a month-over-month basis by 0.1% from November to December 2022 and on a year-over-year basis by 2.8% from November 2022 to November 2023.
In November, year-over-year home price rise dropped to 8.6%, the lowest pace in two years, ending a 21-month run of double-digit growth. Many of the nation's most attractive home markets are slowing appreciation, even as 16 states defied the national trend and had double-digit price increases. The Southeastern states had the highest price increases but also the greatest cooling.
Where Will the Housing Market Crash in 2023?
The CoreLogic Market Risk Indicator (MRI), a monthly update of the overall health of housing markets across the country, predicts that Bellingham, 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; Salem, OR; Merced, CA, and Urban Honolulu, HI are also at very high risk for price declines.
CoreLogic Market Risk Indicators is a multi-phase regression model that provides a probability score (from 1 to 100) on the likelihood of two scenarios per metro: a >10% price reduction and a ≤ 10% price reduction. The higher the score, the higher the risk of a price reduction. CoreLogic is a leading global property information, analytics, and data-enabled solutions provider.
Moody's Analytics, a leading financial services firm, has a relatively bearish outlook for the market, forecasting a 5.1% drop in national home prices between the fourth quarter of 2022 and the fourth quarter of 2023. This would result in a peak-to-trough decline of 10% for US home prices. However, the results are expected to vary significantly depending on regional housing markets and individual neighborhoods.
Of the 322 markets analyzed by Moody's, 178 markets are expected to experience at least a 5% decline in home prices. This includes markets like Morristown, TN, Pocatello, ID, Muskegon, MI, Boise, and Santa Cruz, CA. These markets are at risk due to being too detached from fundamental value during the pandemic housing boom, leading to more rapid price adjustments.
Mark Zandi, Chief Economist at Moody’s Analytics, explains that prices in these markets are less sticky than they have been in the past due to the rapid price increase during the pandemic. Sellers in these markets are willing to lower their prices rapidly in an effort to close a deal. On the other hand, markets like Baltimore and Chicago are expected to fare better, with only a 2.3% and 2.6% drop in home prices, respectively. These markets are not significantly overvalued and therefore, the correction is expected to be less severe.
Zillow remains optimistic about the US housing market in 2023, with a forecast of a 1.1% fall in home values between November 2022 and November 2023. Zillow expects 658 out of the 897 markets it measured to experience a fall in home prices between November 2022 and November 2023, with markets like San Jose (-7.2% projection), Grand Forks, N.D. (-6.7%), Odessa, Texas (-6.4%), San Francisco (-6.1%), and Santa Rosa, Calif. (-5.3%) among those that will see a decline.
On the other hand, 239 markets are expected to see positive or flat home price growth between November 2022 and November 2023, according to Zillow, including markets like Atlantic City, N.J. (+4.2% projection), Homosassa Springs, Fla. (+4.2%), and Yuma, Ariz. (+3.7%).
Hence, the US housing market outlook for 2023 remains uncertain, with a bearish forecast from Moody's Analytics and expected variation in regional and neighborhood markets. The markets that got too detached from fundamental values during the pandemic boom are at greater risk of price correction, while markets that are not significantly overvalued are expected to fare better.
Despite the differences in predictions between Zillow and Moody's Analytics, both forecasts highlight the fact that results in the US housing market could vary significantly across different regions and neighborhoods.
Fannie Mae's housing market forecast released in October 2022 is also less bullish due to softening consumer spending. The ESR group's total home sales outlook for 2023 was revised downward from 4.98 million to 4.47 million units. For 2023, the group projects home price declines of 1.5 percent, down from its prior forecast of home price growth of 4.4 percent, as measured by the Fannie Mae Home Price Index.
Given changes to its outlook for both home sales and mortgage rates, it has lowered its 2023 single-family mortgage originations forecast to $1.74 trillion (previously $2.17 trillion). Aside from reduced affordability, Fannie Mae forecasts that as mortgage rates rise, the “lock-in” effect, in which existing mortgage borrowers have rates well below current market rates, is limiting the number of move-up buyers. While the total inventory of homes for sale continues to rise, this is primarily due to a slowing pace of sales.
Given changes to its outlook for both home sales and mortgage rates, the Economic & Strategic Research (ESR) Group has lowered the 2023 single-family mortgage originations forecast to $1.74 trillion (previously $2.17 trillion). The Economic & Strategic Research (ESR) Group now projects total mortgage originations to fall to $2.29 trillion in 2023. However, this represents an upgrade of $66 billion from the previous month’s forecast.
In 2023, they expect purchase volumes to shrink by 18 percent year over year to $1.3 trillion, a downgrade of $338 billion from last month’s forecast, again driven by weaker home price expectations as well as significant downgrades to its forecast for home sales. In the refinance market, the group expects 2023 refinance volumes will be $392 billion, a downgrade of $98 billion from last month’s forecast, again reflecting our expectation for continued higher rates.
Will the Housing Market Crash?(Quarterly Outlook)
The FMHPI is an indicator of 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 October 2022, the housing market rapidly decelerated as markets absorbed the impact of higher mortgage rates.
Home sales have fallen to a forecasted 5.4 million units at a seasonally adjusted annual rate in the third quarter of 2022 from 7 million earlier this year. Their housing forecast is that home sales activity will bottom at around 5 million units at the end of next year. Falling from 7 million to 5 million would be a decline of about 30% and put the contraction in home sales in line with other historical periods when interest rates increased.
As housing market activity continues to fall, Freddie Mac estimates the months' supply of homes available for sale to rise from historically low levels last year. The easing of the formerly highly restricted for-sale inventory relieves the severe upward pressure on property prices that has existed for the past two years. While fewer sales increase the months' supply, this is partially countered by fewer new listings as high mortgage rates discourage current homeowners from upgrading or downsizing.
House prices have risen by approximately 40% since 2020 (compared to a cumulative inflation rate of 15%), but the rise in mortgage rates has caused a correction in house prices. The government-sponsored enterprise expects house prices to fall slightly, but the downside risks are high. As the labor market cools, housing demand will remain weak in 2023, potentially leading to price declines the following year. However, home price forecast uncertainty is high due to interest rate volatility and the possibility of a recession.
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.
The national Zillow Home Value Index, which rose 10.4% in the 12 months ending in November, is expected to fall 1.1% over the next 12 months. Zillow's forecast for existing home sales in 2022 was revised down slightly as leading indicators point to a continued slowing in the housing market in the near term. A weaker home sales forecast translates to more inventory, and therefore a faster correction in home values, leading to a downward revision.
For the 12 months from December 2022 to December 2023, Zillow projects only a 0.7% decline in the Zillow Home Value Index. High mortgage rates and major affordability challenges are predicted to drive weaker sales in 2023 when they are projected to total 4.4 million, a 13% decrease from the projected full-year 2022 total.
Rising and fluctuating mortgage rates continue to pose difficulties for both prospective home buyers and sellers. Affordability barriers are as high as they've ever been, limiting demand and putting downward pressure on prices. The number of new listings continues to be significantly fewer than a year ago, providing some support for prices but limiting the possibility of sales activity. As the end of the year approaches, the housing market faces considerable downside risks.
One of the most widely held housing market predictions for 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, there is unlikely to be enough to meet demand. The housing market has been particularly robust during 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. As of February 2023, the current average rate for the benchmark 30-year fixed mortgage is hovering around 6%.
Monthly affordability is suffering 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 balanced market. With rates that low in 2021, all kinds of buyers rushed in, and with little housing supply to match, the 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 2023.
Conclusion
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:
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- 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/
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- http://www.freddiemac.com/research/forecast/20210715_quarterly_economic_forecast.page
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- https://www.fanniemae.com/research-and-insights/forecast/weak-growth-continues-housing-slows
