Real Estate 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. Fewer homes are being listed, which may force a greater number of listings to lower their prices to match lower housing demand.
Year-over-year home price growth decelerated in the third quarter, as the sharp rise in mortgage rates – and declining housing affordability. With mortgage rates continuing their rise (at 7.08 percent as of this writing), resulting in rapidly diminishing home purchase demand, home prices are predicted to continue to decline in the near term.
Some housing markets are at risk of crashing or declining 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.
Today, 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 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 of the pandemic. The median list price figures on Realtor.com® are from June 2020 to June 2022. Investor activity was consistent in the summer of 2022, resulting in an increased share of purchases by these buyers despite a fall in overall sales. Every month, about 100,000 properties are purchased by investors of all sizes around the country.
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.
Mark Zandi, the chief economist of Moody's Analytics, said he is concerned about a harsh landing in the housing market. Still, 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.
Fannie Mae's housing market forecast released in October 2022 is also less bullish due to softening consumer spending.
The ESR group lowered their 2022 forecast or total home sales slightly to 5.64 million units, an 18.1 percent decline from 2021, down from our previous forecast of a 17.2 percent drop. The change was disproportionately due to a lower expectation for existing home sales given incoming data and higher mortgage rates (exceeding 6.6 percent according to the most recent Freddie Mac survey).
Their total home sales outlook for 2023 was revised downward from 4.98 million to 4.47 million units. Additionally, the ESR Group has revised downward its forecast for home prices as measured by the Fannie Mae Home Price Index. The ESR Group now anticipates 2022-year-end home prices to rise 9.0 percent, down from a previous forecast of 16.0 percent.
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. Given changes to its outlook for both home sales and mortgage rates, it has lowered our forecast for 2022 single-family mortgage originations to $2.33 trillion (previously $2.44 trillion), and 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.
According to Realtor.com, new listings in September were 9.8 percent lower than a year ago. The combination of decreased affordability and a significant financial disincentive for existing homeowners to take out a new mortgage at current market rates will almost certainly continue to weigh on sales.
The new home sales decline is also expected to continue but there are growing numbers of statements from homebuilders pointing to an increased willingness to more heavily discount homes to drive sales volumes more. While multifamily housing construction continues to move at a strong pace, signs of slowing rents and growing vacancy rates are beginning to develop. The multifamily starts are predicted to slow meaningfully in 2023 following their torrid pace this year.
Will The Mortgage Market Decline?
Given changes to its outlook for both home sales and mortgage rates, the Economic & Strategic Research (ESR) Group has lowered its forecast for 2022 single-family mortgage originations to $2.33 trillion (previously $2.44 trillion), and our 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 be $2.47 trillion in 2022, a downward revision of $61 billion from July’s forecast. In 2023, they expect total originations to fall further to $2.29 trillion. However, this represents an upgrade of $66 billion from last month’s forecast.
The forecast for 2022 purchase mortgage origination volumes has been downgraded by $78 billion from last month’s forecast to $1.6 trillion, driven by recent incoming mortgage application data as well as our downwardly revised outlooks for home sales and home price growth. In 2023, it expects 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, it now expects 2022 volumes to total $701 billion, $30 billion lower than last month’s forecast, driven by declining to refinance applications given the higher interest rate environment. 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. Even industry titans like Zillow decreased their bullishness in September 2022, decreasing their projected home price growth rate for the next twelve months to 1.3 percent.
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 12.9% annual growth to 1.3% growth for the twelve months ending September 2023. Zillow’s home sales forecast now calls for 5.2 million existing home sales in 2022, up slightly from last month’s expectations for 5.1 million sales following a better-than-expected reading on home sales in August.
The outlook from there is cloudier, however, and recent declines in mortgage applications and pending home sales activity suggest that there are significant downside risks to home sales volume into 2023. These prediction changes come at a time when the housing market is rebalancing despite ongoing headwinds.
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 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, 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 now, the current average rate for the benchmark 30-year fixed mortgage has topped 7%.
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.
Only 5% of Metros Are Expected to See a Price Decline by August 2023
The S&P CoreLogic Case-Shiller Home Price Indices are a group of indices that measure real estate or housing prices. They track changes in residential home prices throughout the United States. In August, the CoreLogic S&P Case-Shiller Index posted a 13% increase, down from a 15.6% gain in July, marking the fifth straight month of decelerating annual home price appreciation.
The rapid decline in home prices put this August’s annual gain below those recorded in 2021 and 2004-2005. In addition, the non-seasonally adjusted month-to-month index posted the second month of declines, down by 1.1% in August from a 2.6% peak increase in March and a 0.5% decline in July, suggesting further and potentially quicker deceleration in home price growth.
At this pace, and according to CoreLogic’s Home Price Index forecast, annual growth is expected to slow to 9% by December and down to less than 1% by the end of the first quarter of 2023. Some housing markets are seeing a more significant slowing of home price appreciation, particularly those on the West Coast and in the Mountain West, where high mortgage rates are severely impacting housing affordability.
Nevertheless, differences still exist by geography, with affordable areas in the South and Southeast continuing to thrive as out-migration from more expensive markets persists. However, slowing home price growth should continue nationwide, with the forecast for most metros in the low single digits by early next year. Only about 5% of metros are currently forecast to post price decreases by August 2023.
After six straight months of Tampa, Florida leading the nation for appreciation, Miami posted the strongest annual home price growth among the 20 tracked markets, surging by 28.6% in August, down from July’s non-seasonally adjusted rate of 31.8%. Tampa now ranks second, recording a 28% year-over-year gain in August, down from 31.7% in July.
Charlotte, North Carolina posted the third-highest increase, at 21.3% in August. Phoenix’s rapidly slowing housing market pulled the metro down to the sixth position with a 17.1% increase — down from February’s 32.9% gain when it last posted the index’s strongest price growth.
Where Will the Housing Market Crash?
These top markets are at risk of home price decline/crash in 2023. The CoreLogic Market Risk Indicator (MRI), a monthly update of the overall health of housing markets across the country, predicts that Crestview-Fort Walton Beach-Destin, Florida is at a very high risk (70%-plus probability) of a decline in home prices over the next 12 months. Bremeton-Silverdale, Washington; Bellingham, Washington; Eugene, Oregon and Tacoma-Lakewood, Washington are also at very high risk for price declines.
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.
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-september-2022-31431/
- https://www.fanniemae.com/research-and-insights/forecast/weak-growth-continues-housing-slows
