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Will The Housing Market Crash: Real Estate Crash Again?

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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 fundamental reason house prices have risen so fast in the past two years of the pandemic is a supply-demand imbalance, And, after not building nearly enough houses over the previous decade, it will take at least many years for homebuilders to add enough new supply to balance the market.

The months of supply in a balanced market would be roughly six months—the time it would take to exhaust all homes for sale at the current sales rate. However, the current market has only 3.0 months of supply (up from 2.5 months in June 2021), indicating a significant imbalance in favor of sellers. The slowdown in housing construction continued into June as housing starts fell to their lowest level since September 2021. Housing starts fell by 32k units in June to 1,559,000 (annualized).

With building permits falling for the third month in a row, evidence point to continued weakness in house development, particularly in the single-family category. As mortgage rates remain at levels last seen at the onset of the Global Financial Crisis, it is anticipated that demand will continue to decline throughout the year but there are no signs of a housing market crashing again this year or in 2023.

Pandemic-induced housing boom will slow down somewhat. The slowing economy, combined with inflation and interest rates eroding consumer purchasing power, presents large challenges for the housing market through the rest of the year. That said, a strong labor market remains supportive of demand, and improving supply conditions should help keep the construction market from rapidly deteriorating.

Today's buyers are facing challenges in the form of high prices and mortgage rates. House prices are continuing to grow and new home constrictions lag behind, leaving them in constrained housing conditions. Some buyers move from large cities to cheaper metros. Buying a house today during inflation, even if it means postponing other expenditures, might save money if prices and equity grow. Buyers may save by buying a property and locking in a rate before rates and prices rise further.

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.

Will the housing market crash?
Source: Fannie Mae Home Price Index

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.

Real Estate Housing Market Crash
Source: Freddie Mac

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.

 

will the housing market crash
Source: Zillow

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.

Will the Housing Market Crash

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.

Home Price Appreciation Trends
Source: CoreLogic

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.

Top Markets at Risk of Housing Price Crash
Source: CoreLogic

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

Housing Market Predictions | Real Estate Market Forecast

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Housing Market Predictions

The housing market saw an incredible year last year, with record-low interest rates, the strongest yearly growth in single-family values and rentals, a generational low in foreclosure rates, and the highest number of home sales in 15 years. As numerous buyers battled for the winning bid, house sellers witnessed a market in which their properties sold rapidly and frequently for prices over the listing price.

2022 was also predicted to be a prosperous year for the housing market but rising inflation and mortgage rates changed its outlook completely. Compared to the previous year, the housing market has significantly cooled, with home sales declining and prices rising at a moderate rate. In this blog post, we will discuss the latest housing market predictions for 2022 and the next twelve months.

According to the latest report published by Fortune, Moody's Analytics analyzed 322 regional housing markets. Of those, the firm predicts 100% will see a peak-to-trough home price decline. Moody's Analytics now predicts U.S. home prices will fall 10% between peak-to-trough due to the combination of an intensified housing market downturn coupled with 7% mortgage rates.

Among those markets, Moody's Analytics predicts 196 housing markets to see a home price decline greater than 10%. That includes markets like Morristown, TN (-26% forecasted decline); Muskegon, MI (-25.5%); Pocatello, ID (-23.4%); Boise, ID (-23.3%); and Flagstaff, AZ (-21.6%). Reversely, Moody's Analytics expects the smallest declines to come in Montgomery, AL (-1.4% forecasted decline); Erie, PA (-2.3%); Trenton-Princeton, NJ (-2.7%); Gainesville, FL (-3.1%), and Baltimore-Columbia-Towson, MD (-3.2%).

The forecast by Moody's Analytics also assumes the U.S. does not slip into a recession. If the unemployment rate were to go above 6%, Zandi predicts home price declines would be much greater than his firm currently forecasts. Indeed, if a recession does manifest, Zandi says the peak-to-trough U.S. home price decline would likely be between 15% to 20%. In “significantly overvalued” housing markets, Zandi says, that decline would likely be between 25% to 30%.

As housing demand continues to decelerate and both buyers and sellers attempt to regain their footing, it is important to remember that the surge in housing demand in 2021 was fueled by unusual circumstances, such as COVID-19-induced demand for more space and vacation homes, as well as record-low mortgage rates.

Also Read: Housing Market Trends in October 2022

The path to a healthy housing market will be difficult, but it will eventually provide a better balance between buyers and sellers and, ideally, homeownership chances for households who were excluded during the too-competitive seasons of 2021 and early 2022. Despite this, there are still many concerns regarding the housing market.

Critically, despite the fact that shortage of supply has been one of the primary drivers of home price growth, rising interest rates are deterring both potential sellers and new construction. As a result, there is no hope for an improvement in the housing supply and a sustainable housing market that would result from an increase in inventory.

The large and sudden increase in mortgage rates that occurred this year rendered an already expensive housing market far less affordable. Home prices experienced a meteoric rise in the early years of the Covid pandemic for a number of reasons, including the fact that demand was at an all-time high, supply was at an all-time low, and mortgage rates reached a number of all-time lows.

The current housing market trends indicate buyers remain interested, keeping the market somewhat competitive, especially for attractive, well-priced homes. However, some factors may influence the market's pace or whether it favors buyers or sellers. Higher mortgage rates and recession fears have cooled housing markets from early spring highs.

The majority of the weakening demand appears in expensive West Coast markets where prices have risen in the last two years. Buyers are still interested in more affordable, warmer regions. Buyers continue to face stiff competition, particularly for desirable properties, with multiple offers and final sales prices that exceed asking prices.

The market is shifting away from sellers to more balanced conditions. A little pressure on home price growth will continue through the end of the year, and housing prices will continue to rise due to a supply-demand mismatch. Many experts predicted that the pandemic would result in a housing crash comparable to the Great Depression. That, however, will not happen. Even in the second half of 2022, housing prices are unlikely to fall, but they are expected to rise very slowly as compared to last year's pace.

Housing Market Forecast 2022 to 2023

The latest from Zillow is that it predicts that the final months of 2022 will not bring about significant increases in home values, even though it forecasts that home values will increase in the majority of markets between October 2022 and October 2023. As a result of rising mortgage rates, the value of homes in around two-thirds of the nation's main housing markets declined throughout this past summer.

The economic jolt caused by rising mortgage rates is continuing to eat away at some of the gains that were earned in the spring of 2022. Zillow projects typical U.S. home values to fall 0.6% from October 2022 to January 2023, before recovering and posting 0.8% growth by the end of October 2023. The national Zillow Home Value Index, which rose 11.9% in the 12 months ending in October 2022, is expected to grow by just 0.8% over the next 12 months.

This long-term outlook is slightly lower than last month’s call for a 1.2% annual increase. This downward revision is due in large part to expectations for more declines in home sales volume in the coming months. A weaker home sales forecast translates to more inventory, and therefore a faster correction in home values, leading to a downward revision.

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. Expectations for continued weakness in home sales volume led Zillow’s one-year home value forecast to be revised downward in November.

The real estate group expects 5.1 million existing homes to be sold in the calendar year 2022 – a 16% decrease compared to 2021. This is down slightly from September’s forecast of 5.2 million. High mortgage rates and major affordability challenges are predicted to drive weaker sales in 2023. As mortgage rates reached 20-year highs in October, it is making monthly payments unaffordable for new buyers. As buyers and sellers are stepping away from the market, home prices are likely to remain stable.

Goldman Sachs analysts published a study titled “The Housing Downturn: Further to Fall” on August 30. The investment bank now predicts that activity in the US housing market will be down by the end of 2022. This year, the business predicts steep reductions in new home sales (22%), existing home sales (17%), and housing GDP (8.9%). Goldman Sachs projects further declines in 2023 in new home sales (another 8% drop), existing home sales (another 14% drop), and housing GDP (another 9.2% drop).

Even if employment remains high, housing sales volumes are anticipated to dip in the second half of 2022 and throughout 2023. Historical data suggests that sales could fall by 15% or more. Low inventories will prevent home prices from declining. Strong job growth, low inventories, and tight supply will cause unequal price movements. Lower price tiers are more susceptible to interest rate hikes, while higher price tiers are more resistant to price decreases. The mix of homes that sell may be smaller on average as the market reacts to increasing mortgage rates and decreased affordability.

Current Home Price Trends & Forecast Until August 2023

Attom, a curator of national real estate and land data, recently released its U.S. Home Affordability Report for the third quarter of 2022. The report shows that median-priced single-family homes and condos remain less affordable now than a year ago in 99 percent of the 581 U.S. counties analyzed. The latest number is up from 568 in the same group of counties in the second quarter of 2022, 398 in the third quarter of 2021, and just 284, or less than half, two years ago. And, that’s up from 69 percent in the third quarter of 2021, according to the report.

“While home prices have declined a bit quarter-over-quarter, they’re still higher than they were a year ago, and interest rates have essentially doubled,” Rick Sharga, executive vice president of market intelligence at Attom, said in a statement. “Many prospective homebuyers simply can’t afford the home they hoped to buy, and in many cases no longer qualify for the mortgage they’d need.”

CoreLogic HPI™ is designed to provide an early indication of home price trends. The CoreLogic Home Price Insights report features an interactive view of its Home Price Index product with analysis through August 2022 with forecasts through August 2023. United States home prices nationwide, including distressed sales, increased year over year by 13.5% in August 2022 compared with August 2021.

On a month-over-month basis, home prices declined by 0.7% in August 2022 compared with July 2022. The CoreLogic HPI Forecast indicates that home prices will increase on a month-over-month basis by 0.0% from August 2022 to September 2022 and on a year-over-year basis by 3.2% from August 2022 to August 2023.

home price forecast
Source: CoreLogic

Although U.S. home prices resumed their 127-month streak of annual growth in August, they dropped to 13.5% for the fourth consecutive month. Since April 2021, this is the lowest year-over-year appreciation recorded, which mainly reflects sustained cooling buyer demand due to increased mortgage rates and housing patterns driven by the end of the COVID-19 outbreak.

The 0.7% month-over-month price fall also reflects a decrease in homebuyer enthusiasm, with roughly three-quarters of states reporting declines since July. No states posted an annual decline in home prices. The states with the highest increases year over year were Florida (26.4%), Tennessee (20%), and North Carolina (19.9%). These large cities continued to experience price increases in August, with Miami on top at 27.1% followed by Phoenix at 17.8%, and Las Vegas also at 17.8% year over year.

Current Home Price Trends
Source: CoreLogic

According to CoreLogic’s Home Price Index forecast, annual home price growth is expected to slow to 10% by December, half of the peak 20% increase recorded in April 2022. Home price deceleration and seasonal declines in some markets will provide opportunities for potential buyers who are now facing less competition than earlier this year. Nevertheless, with mortgage rates currently above 6% and little signs of slowing, housing demand will suffer beyond what was initially expected earlier this year.

The 10- and 20-city composite indexes also showed signs of deceleration — up by 14.9% and 16.1% year over year, respectively — compared with 17.4% and 18.7% growth in June. That’s a decline of about 2.5 and 2.6 percentage points, respectively, in just one month. And while the overall tendency for more price increases in smaller markets continues to drive the 20-city index growth higher, slowing price gains were slightly higher in the 20-city index.

Compared with the 2006 peak, the 10-city composite price index is now 44% higher, while the 20-city composite is up by 53%. Adjusted for inflation, which continues to remain concerningly elevated, the 10-city index is now up by 1%, while the 20-city index is up by 7% compared with the 2006 peak.

Housing Market Forecast for the Second Half of 2022

The housing market forecast for 2022 by Realtor.com® was released in June as a mid-year update. After more than a year of skyrocketing demand, and skyrocketing home prices, the housing market appears to be cooling off. The housing market is not collapsing, but it is heading towards more balanced conditions from an unsustainable peak of last year.

Housing Market Predictions 2022

This year, mortgage rates have more than doubled from where they were in early January. Furthermore, the increasing expenses of purchasing a home have altered many prospective purchasers' calculations. As a result, year-over-year house sales have fallen in recent months. A record 79 percent of respondents in a Fannie Mae study on homebuyer sentiment indicated it's a poor time to buy a home.

Home sales activity kicked out 2022 stronger than anticipated, but rising costs have led to altering their forecast downward. Realtor.com now forecasts a 6.7% decline in house sales in 2022. They anticipate the greatest year-over-year decline in house sales at the customary peak of the summer selling season. Home sales on par with these predictions would mean that 2022 sales are the 2nd highest tally since 2007, trailing only 2021.

In the second half of 2022, house price growth will moderate, although it has been hotter for longer than anticipated, resulting in an upwardly revised forecast of a 6.6% home price rise for 2022. That's an increase from their previous forecast of 2.2% growth in home prices. More than a decade of chronic underbuilding, coupled with millions of millennials entering the homebuying stage of life, has resulted in a major mismatch in housing supply and demand in the United States.

  • The median sales price appreciation prediction for existing homes has increased from 2.9% to 6.6% for 2022.
  • The prediction for existing home sales has shifted from positive growth of 6.6% to an annual fall of 6.7%.
  • Mortgage rates have been revised upward to reflect the major shift in monetary policy and financial conditions over the last 6 months.
  • In the second half of 2022, housing finance rates are predicted to climb at a more modest pace, which means that rates may hit 5.5% by year-end.
  • As mortgage rates have increased, prospective homeowners have submitted fewer loan applications.
  • According to the Mortgage Bankers Association, mortgage purchase applications decreased by 16 percent (in the week ending June 10) compared to the same week last year.
  • With mortgage rates, well above 5 percent, refinancing activity, which was brisk during the epidemic when rates were at an all-time low, has dwindled by more than 70 percent compared to last year.

Therefore, don't forecast a halt in the home price rise even though mortgage rates are rising significantly. While housing costs remain high, forcing homebuyers to make difficult decisions, it is predicted that the number of properties for sale will continue to increase, building on the reversal that began in May 2022. That is a sign of relief for first-time home buyers.

Increasing housing inventory is excellent news for buyers. Homebuyers will have additional options as a greater number of homeowners want to adapt their living situations to changing personal demands and take advantage of favorable market circumstances to access the substantial wealth they have accrued.

Homeowners continue to be in a favorable position, particularly those who have owned for extended periods of time and amassed substantial wealth. This is forecasted to attract additional sellers looking to capitalize on favorable market circumstances, resulting in increased competition and a rebalancing of the housing market away from its previous seller-friendly bias. This bodes well for seller-buyers who have been disappointed by the scarcity of purchasing possibilities.

Housing Market Forecast 2022: Freddie Mac

According to Freddie Mac, there are currently 18 percent more persons aged 25 to 34 than there were in 2006. This represents an increase of 6.6 million prospective first-time homeowners, from 39.5 million in 2006 to 46.1 million today. In addition to the increase in first-time homebuyers, the number of high-income renters who can afford to buy and are of prime first-time homebuyer age has also been growing.

In 2006, lending criteria were significantly loosened, and little examination was done to determine whether or not a borrower could repay their loan. These days, the requirements are more stringent, which lowers the risk for both the lenders and the borrowers. Consistent with a more challenging housing market for buyers, the share of buyers that faced at least one mortgage denial before getting approved grew from 22% in 2020 to 34% in 2021.

The government and jumbo segments had the most significant tightening in the previous month. These two housing markets couldn't be more different from one another, and the current situation is in no way comparable to that of the past. The Mortgage Credit Availability Index (MCAI) is an index that is released regularly throughout the year by the Mortgage Bankers Association (MBA). This index is used to measure how simple it is to get a mortgage.

The higher the index is, the more options there are for obtaining mortgage finance. In 2004, the index was hovering around the 400 mark. As the housing market heated up, mortgage loans became more available, and then in 2006, the index surpassed 850. The mortgage credit availability index (MCAI) fell as a result of the fall in the real estate market since it became nearly hard to get mortgage financing.

Since then, thankfully, the conditions for lending have been relaxed a little bit, although the index is still relatively low. The index had a reading of 108.3 in August 2022, which is around one-seventh of what it had been in 2006. It remains more than 30 percent below pre-pandemic levels. Because there aren't as many options on the housing market, a lot of people in the United States are having a hard time finding the house of their dreams.

The MCAI fell by 0.5 percent in August. A decline in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of loosening credit. The index was benchmarked to 100 in March 2012. The Conventional MCAI decreased by 1.0 percent, while the Government MCAI remained unchanged.

Over the past decade, chronic underbuilding and the influx of millions of millennials into the homebuying market have resulted in a major mismatch in housing supply and demand. Even though mortgage rates are skyrocketing, the housing market is not going to crash any time soon. The result will be a much slower rate of appreciation than in the past two years. We are predicting the housing market for the next 5 years and to recognize patterns that may influence real estate values and rentals beyond a year.

Freddie Mac's own regression research indicates that a 1 percent rise in mortgage rates reduces home price increases by around four percentage points (for example, moving from 11 percent home price growth a year to 7 percent ). In contrast, analysts at J.P. Morgan expect a greater impact of around six percentage points lower home price increase.

Since home values are so high, the housing market may be more susceptible to rate increases than in the past; therefore, the greater estimate appears realistic. While it seems apparent that rising interest rates will reduce housing demand by reducing affordability, the actual past is a significantly less reliable indicator of what will occur because of a huge balancing impact – interest rates often rise when the economy is expanding.

The government-sponsored enterprise forecasts that for every one percentage point increase in mortgage rates, house sales would decrease by around five percent, and price growth will slow by four to six percentage points. If mortgage rates stabilize at current levels, and all other factors remain constant, their analysis predicts a much slower, but still positive house price rise with a wide regional range depending on migration trends.

As work-from-home becomes increasingly popular, it is anticipated that the housing market will continue to be undersupplied and that migration to lower-cost areas will continue to rise. This is significant since most booming cities have a major housing shortage due to a previous inflow of population.

Finally, favorable demographics suggest that the robust demand for first-time homebuyers will persist. This is due to the fact that there are still a substantial number of younger renters with sufficient income to sustain homeownership, and they should continue to be a formidable force for the foreseeable future. As the economy faces various headwinds in the next months and years, these variables should continue to exert a substantial influence on the housing market.

The quarterly housing outlook pulse poll conducted by Freddie Mac assesses public attitudes on housing-related problems. Since the beginning of the epidemic, market confidence has reached its lowest point in the second quarter of 2022. In addition, as a result of the impact of growing inflation on the cost of living, they found an increase in housing payment difficulties, particularly among renters.

  • 51% are confident the housing market will remain strong over the next year.
  • This is down 7 percentage points from last quarter.
  • 56% of renters and 24% of homeowners spend more than 30% of their monthly income on housing.
  • 51% are concerned about making housing payments, up 4 percentage points from last quarter.
  • This is true for 68% of renters (a 10-percentage point increase from last quarter) and 38% of homeowners (a 3-percentage point decrease from last quarter).
  • 24% are likely to buy a house in six months.
  • 17% of homeowners are likely to sell in the next six months.
  • 23% of homeowners are likely to refinance in the next six months.
Housing Market Outlook
Source: Freddie Mac

Housing Market Crash Predictions For Next Few Years

The housing market is far better than it was a decade ago. Last year, the housing industry experienced a boom, with the most significant annual increase in single-family house values and rentals, historically low foreclosure rates, and the highest number of home sales in 15 years, totaling 6.9 million for the entire year. Over the previous two years, national home prices increased by 33%.

The market was driven by record-low borrowing rates in 2020 and 2021, as well as a supply constraint due to underbuilding. The enormous demand from first-time buyers is almost as important as the limited new supply. The current housing market is also being driven by exceptionally favorable age demographic trends.

The overarching concern is whether or not the housing market will crash, and if so, when. The simple answer is that it will not crash anytime soon and we certainly don't see a housing market crash coming in 2023. Rising rates are cooling the market as some expected but the prices are still rising at a slower rate. The current trends and the forecast for the next 12 to 24 months clearly show that most likely the housing market is expected to see a positive home price appreciation.

In recent years, the price of homes has climbed dramatically. Many prospective buyers, especially those with limited financial resources, are eager to hear whether and when home prices will become more accessible. Here is when housing market prices are going to crash. While this may appear to be an oversimplification, this is how markets operate.

When demand is satisfied, prices fall. In many housing markets, there is an extreme demand for properties at the moment, and there simply aren't enough homes to sell to prospective buyers. Home construction has been increasing in recent years, but they are so far behind catching up. Thus, to see significant declines in home prices, we would need to see significant declines in buyer demand.

Demand declines primarily as a result of rising interest rates or a slowing economy in general. Ultimately, for rising interest rates to destroy home values, we'd need substantially less demand and far more housing supply than we presently have. Even if price growth moderates this year, it is extremely improbable that home prices will crash. Thus, there will be no crash in home prices; rather, there will be a pullback, which is normal for any asset class. The home price growth in the United States is forecasted to just “moderate” and slow down in 2022 and 2023.

Affordability will be a concern for many, as home prices will continue to rise, if at a slower pace than the previous year. With 10 years having now passed since the Great Recession, the U.S. has been in the longest period of continued economic expansion on record. The housing market has been along for much of the ride and continues to benefit greatly from the overall health of the economy.

However, hot economies eventually cool and with that, hot housing markets move more toward balance. Housing market forecasts are essentially informed guesses based on existing patterns. While the real estate pace of last year appears to be reverting to seasonality as we approach 2022, demand is not waning.

Increasing interest rates will almost certainly have a greater impact on the national housing market in 2022 than any other factor. While sellers remain in an advantageous position, price stability and the continuation of competitive interest rates may provide some much-needed relief to buyers this year. Housing supply is and will likely remain a challenge for some time as labor and material shortages, as well as general supply chain issues, delay new construction.

The latest housing market trends show that prices are rising in most parts of the country and most price segments because of the lack of supply. Economic activities are ramping up in all sectors, mortgage rates are rising, and jobs are also recovering. The housing market remains largely a seller's market due to demand still outpacing supply. The inventory of available houses continues to be a constraint on both buyers and sellers.

Forecasting home price appreciation is a challenging task. While inventory has increased slightly, it remains significantly below pre-pandemic levels and is simply unable to meet current demand. Tight supply following years of underbuilding, combined with increased demand due to remote work, and US demographics — will continue to be a factor in 2023. It will continue to be a moderate seller's real estate market in 2023.

References

  • https://www.realtor.com/research/
  • https://www.realtor.com/research/blog/
  • https://www.bankrate.com/mortgages/mortgage-rates/
  • https://www.blackknightinc.com/
  • https://www.freddiemac.com/research/forecast
  • https://www.yahoo.com/video/moody-home-prices-crash-20-142931780.html
  • https://www.realtor.com/research/2022-national-housing-forecast-midyear-update/
  • https://www.nar.realtor/research-and-statistics/housing-statistics/
  • https://www.corelogic.com/intelligence/u-s-home-price-insights/
  • https://www.realtor.com/research/top-housing-markets-2022/
  • https://www.zillow.com/research/home-value-sales-forecast-october-2022-31556/
  • https://www.zillow.com/research/daily-market-pulse-26666/
  • https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index.aspx
  • https://www.realtor.com/research/2021-national-housing-forecast/
  • http://www.freddiemac.com/research/forecast/20210715_quarterly_economic_forecast.page
  • https://www.investopedia.com/personal-finance/how-millennials-are-changing-housing-market
  • https://www.freddiemac.com/research/consumer-research/20220617-housing-sentiment-second-quarter-2022
  • https://www.mba.org/news-and-research/research-and-economics/single-family-research/mortgage-credit-availability-index-x241340

If The Housing Market Crashes What Happens To Interest Rates?

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In the summer of 2022, there is a lot of speculation in the media that the slowing housing market is an indication that the market is headed for a housing crash. People who recall the subprime mortgage crisis are concerned that the recent spike in home prices followed by a pause signals the bursting of another housing bubble. But is the housing market truly in a bubble?

During a housing market crash, the value of a home decreases. You will find sellers that are eager to reduce their asking prices. Sellers may be more motivated to bargain on price or make concessions to buyers. Due to the crash, there may also be short sales and foreclosures, offering you the opportunity to acquire a deal. Many homebuyers may feel that obtaining a mortgage is too risky.

Recessions are temporary pauses in an otherwise booming economy, but they have an impact on the housing market and interest rates. This break, however, may be an excellent moment to purchase or refinance a property. Discuss with your lender how recessions affect interest rates, how you might reduce your mortgage rate, and how to mitigate your homebuying risk. Now, it's more likely that home prices will not crash, and will continue to rise, although at a slower pace.

There is a lower likelihood that a borrower would default on a mortgage. New laws and lessons learned from the 2008 financial crisis have resulted in tougher lending criteria in today's housing market compared to the previous one. Mortgage approval rates today are lower than they were in the pre-crisis era, which suggests that borrowers are less likely to default on their loans. Before the previous housing crash, it was popular for lenders to issue so-called “no-doc loans,” which did not require borrowers to submit proof of their income.

A minimum credit score and a minimum down payment are often required for government-backed loans. According to regulations, lenders must now check a borrower's capacity to repay the loan, among other conditions. Lending standards have tightened and new mortgage credit scores are substantially higher on average now than they were in the early 2000s.

It is also important to keep in mind that a recession will not have a significant impact on home prices if the supply and demand for housing fall at about the same time. Interest rates are one factor that may make a difference. Reduced mortgage rates and consequently lower house costs can bring properties that were previously out of reach within reach. You stand a better chance of your application being approved if you've got good credit.

What Happens to Interest Rates if the Housing Market Crashes?

In a recession, people do not spend, money does not move freely across the economy. They decide against spending and instead save for a better price the next day. Or they save money and do not spend it because they believe they should have precautionary savings. This is true for any industry, including real estate or the housing market.

The Federal Reserve may alter interest rates soon in an effort to minimize economic damage. Occasionally, this helps stabilize markets and boost consumer confidence, resulting in increased expenditure. The adjusted interest rate is used by lenders to determine their interest rates for loans and mortgages in any way possible.

Loans aren't in high demand during a recession since individuals are reluctant to spend money and want to preserve it. Mortgages come in a variety of forms, and each has its advantages and disadvantages, regardless of the economic climate. It's up to you to decide how much risk you're willing to take, but your lender may provide guidance.

The Great Recession left an everlasting imprint on future housing markets. During that period of economic downturn, a greater number of homeowners had mortgages that were upside-down, which means that they owed more on their property than it was worth. As a result of the turmoil that was caused by unemployment and the high levels of consumer debt, lenders were obliged to evaluate in a more strict manner.

The graph below depicts the average 30-year fixed-rate mortgage based on Freddie Mac data obtained from FRED at the Federal Reserve Bank of St. Louis. The shaded areas represent U.S. recessions. The most recent recession, which ran from February to April of 2020, was the COVID-19 pandemic.

Freddie Mac's weekly survey indicates that during this brief period, the 30-year fixed mortgage rate declined from 3.45 percent to 3.23 percent. Thereafter, rates continued to decline, reaching record lows in January 2021. Throughout the Great Recession, which lasted from December 2007 to June 2009, 30-year fixed mortgage rates fluctuated between 6.10 and 5.42 percent.

Mortgage Rates During Past Recessions

The Great Recession was sparked by the mortgage crisis, which led the global financial system to collapse. From March 2001 to November 2001, during the early 2000s recession, mortgage rates decreased from 6.95 percent to 6.66 percent. From July 1990 to March 1991, during the recession of the early 1990s, mortgage rates declined from around 10 percent to 9.5 percent.

In the early 1990s recession, which was from July 1981 to November 1982, interest rates fell from 16.83 percent to 13.82 percent. From January 1980 to July 1980, rates decreased rather slowly, from 12.88 percent to 12.19 percent. In every instance, mortgage rates decreased during a recession. Obviously, the reduction varied from as little as 0.22 percent to as much as around 3 percent.

The lone exception was the 1973-1975 recession, which was caused by the 1973 oil crisis and saw rates rise from 8.58 to 8.89 percent. That was a time of so-called stagflation, which, according to some analysts, is reoccurring but remains to be seen. Homeowners, potential house purchasers, and the mortgage sector will all be hoping for the latter, a large fall in mortgage rates.

Many economists equate the 1980s to the present day, so it's feasible that we'll finally see significant respite. How much farther will mortgage rates rise before a recession, if one occurs at all, is the question. Will the 30-year fixed rate continue to rise to 7 or 8 percent by the end of 2022 or the beginning of 2023, then decrease to 6 percent?

If this is the case, any fall associated with a recession would simply return rates to their current elevated level. In other words, brace for the worst while the Fed does its utmost to combat inflation and hope for a swift recovery. In either case, you may wish to bid farewell to mortgage rates between 3 and 4 percent, at least for the foreseeable future.

What Happens to My Mortgage if the Housing Market Crashes?

The 2008 housing crash imposed an enormous financial burden on US households. As house prices fell by 30 percent nationwide, roughly 1 in 4 homeowners was pushed underwater, eventually leading to 7 million foreclosures. After a housing bubble burst, property values in the United States plunged, precipitating a mortgage crisis. Between 2007 and 2010, the United States subprime mortgage crisis was a transnational financial crisis that led to the 2007–2008 global financial crisis.

It was precipitated by a sharp decrease in US house values following the bursting of a housing bubble, which resulted in mortgage delinquencies, foreclosures, and the depreciation of housing-related assets.  The Great Recession was preceded by declines in home investment, which were followed by declines in consumer expenditure and subsequently business investment. In regions with a mix of high family debt and higher property price decreases, spending cuts were more pronounced.

The housing bubble that preceded the crisis was financed with mortgage-backed securities (MBSes) and collateralized debt obligations (CDOs), which initially provided higher interest rates (i.e., greater returns) than government securities as well as favorable risk ratings from rating agencies. Several large financial institutions collapsed in September 2008, resulting in a huge interruption in the supply of credit to businesses and individuals, as well as the commencement of a severe worldwide recession.

When property values in the United States fell precipitously after peaking in mid-2006, it became more difficult for borrowers to restructure their loans. Mortgage delinquencies skyrocketed as adjustable-rate mortgages began to reset at higher interest rates (resulting in higher monthly payments). Securities backed by mortgages, notably subprime mortgages, were extensively owned by financial firms throughout the world and lost the majority of their value.

Global investors also curtailed their purchases of mortgage-backed debt and other assets as the private financial system's ability and willingness to support lending declined. Concerns over the health of US credit and financial markets led to credit tightening globally and a slowing of economic development in the US and Europe.

Here's Why This Housing Slowdown Is Unlike Any Other

There aren’t as many risky loans or mortgage delinquencies, although high home prices are forcing many people out of the market. But if the Great Recession was triggered by a 2007-08 housing market crash, is today's market in a similar predicament? No, that's the simplest response. Today, the housing market in the United States is in much better shape. This is in part due to the stricter lending laws that were implemented as a result of the financial crisis. With these new guidelines, today's borrowers are in a far better position.

The average borrower's FICO credit score is a record high 751 for the 53.5 million first-lien home mortgages in the United States today. In 2010, it was 699, two years after the collapse of the banking industry. Considerably this is reflected in the credit quality as lenders have become much more rigorous about lending. As a result of pandemic-fueled demand, home prices have risen over the previous two years. Now homeowners have historic levels of equity in their homes.

According to Black Knight, a provider of mortgage technology and analytics, the so-called tappable equity, which is the amount of cash a borrower may withdraw from their house while still leaving 20% equity on paper, set a new high of $11 trillion this year. That's a 34% rise over the same period last year. Leverage, or the ratio of a homeowner's debt to the value of his or her house, has declined precipitously at the same time.

This is the lowest level of mortgage debt in US history, at less than 43 percent of home prices. When a borrower has more debt than the value of their house, they have negative equity. When compared to 2011, when over one-fourth of all borrowers were underwater, this is an improvement. Only 2.5% of borrowers have equity in their houses less than 10%. If property values do decline, this will give a significant amount of protection.

Just 3 percent of mortgages are past due, which is a record low for mortgage delinquencies. There are still fewer past-due mortgages now than before the epidemic, despite the dramatic rise in delinquencies during the first year. There are still 645,000 borrowers in mortgage forbearance programs connected to the pandemic that has helped millions of people recover.

Even though the pandemic-related forbearance programs have been exhausted by some 300,000 debtors, they are still overdue. Even though mortgage delinquencies are still at historically low levels, recent loan originations have seen a rise in the number of defaults.

The most pressing issue in the housing market right now is home affordability, which is at an all-time low in most regions. While inventory is increasing, it is still less than half of what it was before the pandemic. Rising inventory may ultimately chill house price rise, but the double-digit rate has shown to be extremely resilient thus far. As rising home costs begin to strain some buyers' finances, those who remain in the market should expect less competitive circumstances later in the year.

Home Values May Decline Regardless of a Recession

The housing market is based on a supply and demand cycle. A buyer's market exists when there is a big inventory of properties for sale, and property prices tend to decline. When inventory is low, however, residences are in high demand and the market shifts to a seller's market. It takes time to develop new dwellings and replenish supplies.

Housing prices will begin to fall if inventory grows and demand is fulfilled. Another reason that property prices have lately slowed is that individuals can no longer afford them. Income levels have not kept pace with house costs, and many first-time buyers who are still saddled with college loans cannot afford the extra weight of a mortgage.

The current housing inflation storm is driving buyers out of the market, contributing to the protracted period of extremely limited inventory—but sellers are still hesitant to lower prices. Waiting may be the best option for purchasers with time, regardless of whether there is a recession. According to Realtor.com, the number of houses for sale increased by the most in June 2022 on record. Active listings increased 18.7 percent year on year, but property prices remain persistently high.

In June, the national median listing price for active properties increased 16.9 percent from the previous month to $450,000. So far, property prices are up 31.4 percent from June 2020. It may take some time for values to fall because sellers are still trying to obtain top money for their property. Sellers are attempting to price their houses in line with recent comparables that closed in 2021—when mortgage rates were still at record lows and inventory was scarce.

However, many purchasers are waiting to see what happens in the autumn housing market, when there will be more inventory as well as greater competition. There is a lack of consensus on whether or not now is a good moment to purchase a house. In contrast to the most recent housing crash, which occurred during the financial crisis of 2008, we are currently experiencing growing inflation while job levels continue to be solid. The majority of economists were surprised by how quickly jobs were added in June.

The jobs market has been seen as the bulwark against a recession, and June’s numbers show that the employment pillar remains strong. Job growth accelerated at a much faster pace than expected in June, indicating that the main pillar of the U.S. economy remains strong despite pockets of weakness. Nonfarm payrolls increased 372,000 in the month, better than the 250,000 Dow Jones estimate and continuing what has been a strong year for job growth, according to data from the Bureau of Labor Statistics.

“The strong 372,000 gain in non-farm payrolls in June appears to make a mockery of claims the economy is heading into, let alone already in, a recession,” said Andrew Hunter, senior U.S. economist at Capital Economics.

The years that you anticipate living in the house is another factor that might play a role in determining whether or not you should buy it right away. Those who do not intend to remain in the house for at least five years after the purchase may end up losing money if the housing market experiences a crash after the purchase and they decide to sell. On the other side, attempting to time the market incorrectly might result in you missing out on the opportunity to purchase your ideal house.

You may be priced out of the market if interest rates continue to climb and home prices do not fall by an amount that is sufficient to compensate for high mortgage expenses. Buyers are in a better position to take advantage of the increasing availability of houses now that sellers are asking for more reasonable prices for their properties. If there is a downturn in the economy, mortgage interest rates will very certainly fall to about 4 percent or even lower. If it does, it could be a good time to hold off and save some money, especially for first-time homeowners.

Sources

  • https://www.forbes.com/advisor/mortgages/real-estate/housing-market-recession/
  • https://www.thetruthaboutmortgage.com/mortgage-rates-vs-recessions/
  • https://www.chase.com/personal/mortgage/education/financing-a-home/effects-of-recessions-on-mortgages
  • https://www.cnbc.com/2022/06/20/heres-why-this-housing-downturn-is-nothing-like-the-last-one.html

Where Are Housing Prices Falling 2022?

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Fortune reached out Moody's Analytics to get access to its latest proprietary housing analysis. The financial intelligence business predicted home price changes in 414 markets between 2022 and 2024. Moody's Analytics expects that 210 of the nation's 414 major housing markets will see home prices falling in the next two years and 204 will see home prices rise. 183 of the 413 biggest U.S. home markets are “overvalued” by more than 25%. Boise, Idaho, is 71.7% overvalued, and Flagstaff, Arizona, is 60.6%.

Redfin revealed its “risk score” on Friday, which identifies the home markets that are most vulnerable to a “housing slump.” The greater a market's “risk score,” the more likely it is that house prices will fall year over year.  Redfin examined 98 regional housing markets and evaluated indicators such as home-price volatility, average debt-to-income ratio, and home-price growth. Among the 98 markets measured by Redfin, Riverside had the highest likelihood of seeing a “housing downturn.”

It was followed by Boise, Cape Coral, North Port, Las Vegas, Sacramento, Bakersfield, Phoenix, Tampa, and Tucson. Popular migration destinations where home prices soared during the pandemic, such as Boise, Phoenix, and Tampa, are most likely to see the effects of a housing downturn amplified and year-over-year home prices decline if the economy enters a recession, a scenario that some economists believe is likely as inflation persists and stock markets stumble.

<<<Also Read: Will the Housing Market Crash? >>>

Homeowners in those markets who are considering selling should market their properties as soon as possible to avoid price drops. Rust Belt cities like Cleveland and Buffalo, which are still inexpensive, are the most resilient to a housing market crash. The U.S. housing market slowed significantly in the spring due to rising mortgage rates. Redfin studied which metros are most vulnerable to home-price reductions if the country enters a recession and which are most immune to an economic slump.

Recession-proof northern metros, including Cleveland and Buffalo, NY, are relatively inexpensive. Prospective homebuyers in these places can proceed with confidence. Redfin's examination of 98 U.S. metros with relevant data utilizes home-price volatility, average debt-to-income ratio, and home-price growth. Each metro is given an overall risk score relative to the others. 100 indicates the highest possibility of a housing market slump, including home-price decreases, while 0 indicates the lowest.

“Recession fears are escalating, mostly because the Fed has signaled it will continue to raise interest rates to tame inflation and cool consumer demand. Higher interest rates led to surging mortgage rates, which have already cooled down the housing market,” said Redfin Senior Economist Sheharyar Bokhari. “If the U.S. does enter a recession, we’re unlikely to see a housing-market crash like in the Great Recession because the factors affecting the economy are different: Most homeowners have a fair amount of home equity and not much debt and unemployment is low.”

Housing Markets at Risk of Falling Home Prices

If the U.S. enters a recession, Riverside's home market will chill the most. It has the highest danger score of any major U.S. city, 84. It's more likely than other metros to see prices drop year over year during a recession or economic slowdown, according to housing and economic statistics. Riverside, which includes San Bernardino, Ontario, and Palm Springs, has variable house values and was a favorite location during the epidemic for both permanent movers and second-home buyers.

Riverside is followed by Boise (76.9), Cape Coral, FL (76.7), North Port, FL (75), and Las Vegas (74.2).

Sacramento, CA (73.1), Bakersfield, CA (72.2), Phoenix (72), Tampa, FL (70.7), and Tucson, AZ (70.1) round out the top 10.

Many of these housing markets, like Riverside, are popular migration destinations or have quickly growing property prices, both of which increase their likelihood of a housing slump. Boise, Cape Coral, North Port, Las Vegas, Sacramento, and Phoenix were among the 20 fastest-cooling areas in May when mortgage rates reached 5.5%. As the economy continues to decline, prices may fall in many of these metros. Six of the 10 areas most at risk of downturns are among the most popular destinations for Redfin.com users moving from one metro to another.

Maricopa County (Phoenix) and Riverside County gained more residents from other parts of the U.S. than anywhere else in 2021, according to the U.S. Census. The most vulnerable metros have likewise seen an outsized price rise. North Port has the nation's fastest-growing house values, up 30.5 percent year over year in May, followed by Tampa (28.1 percent) and Las Vegas (26.8 percent ). Overall, nine of the ten most vulnerable locations had faster-growing house values than the national median (the exception is Sacramento, however, home prices there rose more than 40% throughout the pandemic, reaching $610,000 in May 2022).

Several of those metros went from inexpensive to unaffordable during the epidemic, owing in part to the migration of individuals from other locations. Among them is Boise, where the typical home price increased from $330,000 to $550,000 between May 2020 and May 2022, and Phoenix, where it increased from $300,000 to $485,000.

“Boise’s market is already turning around, as a lot of the people who moved to Idaho during the pandemic are either moving back to their hometowns or cashing in and moving to more affordable places. The housing market was hot during the pandemic, largely because of out-of-town buyers,” said Boise Redfin agent Shauna Pendleton.

Three at-risk metros are in California and three in Florida. San Jose, Oakland, and San Francisco experienced relatively moderate price increases throughout the epidemic, its people tend to have high salaries and considerable home equity, and their housing markets started falling fast in the first half of 2022, mainly owing to collapsing tech stocks. Not all homes in these metros will lose value. Large single-family houses in spread-out areas are recession-proof.

Housing Markets in Which Prices Are Unlikely to Fall

Relatively affordable Rust Belt metros are most resilient in the face of a recession. In case of a recession, Akron, Ohio has the lowest risk of experiencing a housing decline. It has the lowest total risk score of any major US city at 29.6. Low home-price volatility, a low debt-to-income ratio, a small number of second houses, and the fact that properties in Akron are unlikely to be flipped are some of the characteristics that make the city relatively stable.

With an overall risk score of 30.4, Akron is followed by Philadelphia, Montgomery County, PA (31.4), El Paso, TX (32.2), and Cleveland (32.4). The top ten include Cincinnati (32.6), Boston (32.6), Buffalo, NY (33.1), Kansas City, MO (33.4), and Rochester, NY (34.4). Almost all of those metros are inexpensive and have relatively slow-increasing prices, both of which would benefit their housing markets in the event of a recession.

Almost all of the most resilient metros are located in the northern United States, either in the Rust Belt or on the East Coast. Three of them are in Ohio, two in New York, and two in Pennsylvania. In nine of the ten most resilient metros, prices climbed at a slower rate than the national average (El Paso is the exception).

Seven of the 10 metros least in danger of a housing downturn had a median sale price below $300,000 in May, and nine of them were below the $431,000 national median. Affordability benefits property markets in a recession because more people can buy houses, and such locations may attract out-of-town buyers. Boston is pricey, although property prices climbed modestly throughout the epidemic. It's busy and lost residents as remote work became prevalent.

U.S. Metros Most and Least Susceptible to a Housing Downturn in the Next Recession

Ranked by highest to the lowest chance of a housing downturn. The ranking combines 10 indicators to come up with an overall risk score for each metro, relative to the other metros in this analysis. The highest possible score is 100 and the lowest possible score is 0. The indicators are as follows: home price volatility, average debt-to-income ratio, average home-loan-to-value ratio, labor market shock, percent of homes flipped, how much the housing market is “cooling” compared with other metros, the year-over-year change in domestic migration, the share of homes in the metro that are second homes, year-over-year price growth and elasticity of supply. Each factor is weighted equally.

U.S. Metro Area

 Overall Score Average Home-Loan-to-Value Ratio, 2021 Percent of Homes Flipped in 2021 Rank: How Quickly Housing Market Cooled in First Half of 2022 Net Domestic Migration in 2021, YoY Share of Second Homes, 2021 Price Growth in 2021, YoY
Riverside, CA 84 83% 4.50% 15 19,204 7.70% 21.00%
Boise, ID 76.9 6 6,782 6.00% 30.90%
Cape Coral, FL 76.7 81% 2.90% 11 7,345 23.40% 23.60%
North Port, FL 75 79% 4.40% 18 8,283 20.20% 23.30%
Las Vegas, NV 74.2 84% 8.30% 12 -15,143 7.60% 18.60%
Sacramento, CA 73.1 81% 5.40% 2 4,157 4.30% 19.30%
Bakersfield, CA 72.2 87% 3.80% 21 6,111 2.50% 17.30%
Phoenix, AZ 72 82% 10.30% 17 -15,530 7.20% 25.40%
Tampa, FL 70.7 85% 7.40% 22 524 8.10% 19.60%
Tucson, AZ 70.1 84% 7.70% 54 -2,677 7.10% 21.50%
San Diego, CA 69.8 81% 5.30% 8 -8,189 3.70% 17.50%
Jacksonville, FL 69.3 85% 7.20% 36 4,136 6.20% 16.60%
Stockton, CA 68.2 84% 4.70% 5 3,578 1.00% 19.30%
Knoxville, TN 67 86% 4.60% 13 4,527 5.20% 18.30%
Orlando, FL 63.8 85% 6.40% 31 -6,536 8.70% 16.70%
Charleston, SC 63.4 85% 3.80% 67 -2,921 7.60% 15.40%
West Palm Beach, FL 63.3 80% 3.10% 30 972 12.00% 17.40%
Fresno, CA 60.6 85% 4.70% 37 2,719 2.90% 17.90%
Raleigh, NC 60.4 83% 8.90% 42 3,430 2.60% 17.50%
Oxnard, CA 59.8 79% 2.50% 28 323 3.30% 16.70%
Salt Lake City, UT 57.7 -3,020 2.00% 22.80%
Columbia, SC 56.9 90% 4.40% 2,296 3.20%
Providence, RI 56.6 85% 2.70% 44 3,664 3.90% 15.40%
Atlanta, GA 56.4 86% 9.90% 47 -4,229 2.20% 19.20%
Miami, FL 56.3 82% 2.90% 53 -5,120 5.90% 18.60%
Charlotte, NC 56.1 85% 10.10% -6,444 2.70% 16.50%
Virginia Beach, VA 55.8 92% 3.20% 80 864 3.40% 8.30%
Tacoma, WA 55.5 9 -3,571 1.70% 19.80%
Detroit, MI 54.8 87% 5.20% 70 -2,062 1.00% 15.40%
Los Angeles, CA 54.8 79% 4.10% 46 -69,329 1.90% 17.30%
Austin, TX 54.6 16 -8,609 3.90% 31.60%
Portland, OR 54.3 82% 3.70% 14 -17,716 2.30% 15.40%
Anaheim, CA 53.9 76% 4.50% 20 -6,644 3.80% 16.00%
Denver, CO 53.8 82% 6.90% 7 -18,063 2.40% 16.70%
Colorado Springs, CO 53.7 87% 5.00% 693 2.50%
Baton Rouge, LA 52.4 89% 3.00% 2,287 2.40% 9.80%
Greenville, SC 52.1 85% 3.50% 32 1,771 4.70% 14.00%
Winston-Salem, NC 51.9 87% 5.10% 2.70% 13.70%
Grand Rapids, MI 51.7 86% 3.60% 29 1,028 2.40% 15.20%
Greensboro, NC 51.7 87% 6.70% 38 -181 2.10% 11.80%
Warren, MI 50.5 86% 2.90% 35 6,180 1.60% 11.40%
Tulsa, OK 50.1 88% 3.40% 45 2,325 2.10% 12.50%
Fort Lauderdale, FL 49.9 82% 3.00% 72 -5,121 7.50% 13.30%
Fort Worth, TX 49.6 50 1,978 1.70% 18.30%
Nashville, TN 49.3 84% 8.30% 48 -6,093 3.40% 17.00%
Allentown, PA 48.6 87% 2.20% 62 3,722 3.40% 14.20%
Camden, NJ 47.9 88% 3.00% 75 4,300 0.50% 17.90%
Houston, TX 47.7 24 -334 2.90% 15.50%
Seattle, WA 47.6 79% 1.90% 4 -37,365 1.80% 17.20%
Nassau County, NY 47.4 80% 3.60% 58 12,296 4.70% 15.20%
Albuquerque, NM 46.8 -1,714 2.80%
New Orleans, LA 46.6 88% 2.90% 23 -3,930 3.40% 10.70%
San Antonio, TX 46.6 40 -138 2.90% 15.10%
San Jose, CA 46.4 74% 2.50% 1 -22,661 0.80% 13.60%
San Francisco, CA 46.3 72% 1.90% 10 -55,918 2.40% 4.80%
Oakland, CA 45.8 78% 2.60% 3 -23,280 1.00% 16.30%
Dallas, TX 45.4 40 -5,685 1.70% 17.90%
Richmond, VA 45.4 87% 3.70% 59 1,995 1.40% 12.30%
Oklahoma City, OK 45.3 88% 5.10% 52 476 1.70% 10.60%
Washington, D.C. 44.2 87% 2.50% 28 -35,800 1.50% 10.10%
New Haven, CT 44.1 87% 2.00% 82 4,492 1.90% 15.80%
Birmingham, AL 43.4 88% 5.90% 68 95 1.40% 8.40%
Little Rock, AR 43.1 89% 4.90% 43 472 1.80% 10.70%
Frederick, MD 42.9 84% 2.00% 25 -58 0.90% 11.70%
Memphis, TN 42.7 87% 7.50% 33 -535 1.20% 13.30%
Honolulu, HI 42.6 79% 0.50% 19 6.20% 7.80%
St. Louis, MO 42.2 86% 3.40% -2,214 1.30% 10.10%
Baltimore, MD 41.9 86% 2.60% 74 6,085 1.40% 8.50%
Bridgeport, CT 41.7 81% 1.10% 88 8,871 2.00% 11.60%
Worcester, MA 40.8 86% 1.80% 57 3,354 1.20% 16.10%
Indianapolis, IN 39.9 41 902 1.40% 13.50%
Newark, NJ 39.3 84% 1.90% 73 7,348 2.80% 13.20%
Wichita, KS 39.3 -1,813 1.10% 12.50%
Lake County, IL 38.6 85% 1.80% 87 2,746 1.70% 14.40%
Louisville, KY 38.6 87% 4.80% 34 -378 1.20% 9.70%
Wilmington, DE 37.8 88% 2.80% 64 738 1.80% 11.30%
Hartford, CT 36.8 86% 1.70% 80 7,182 1.80% 12.00%
Minneapolis, MN 36.8 85% 3.70% 50 -10,673 1.30% 11.10%
Gary, IN 36.7 939 1.20% 9.70%
Pittsburgh, PA 36.4 87% 1.60% 76 -337 1.50% 12.70%
Elgin, IL 35.8 84% 1.10% 60 3,590 0.60% 11.50%
New York, NY 35.4 78% 1.70% 48 -2,01,570 2.80% 12.30%
Syracuse, NY 35.2 86% 2.20% 1,510 3.30% 11.00%
Milwaukee, WI 35.1 86% 3.30% 79 -2,993 1.40% 7.20%
Omaha, NE 35.1 87% 4.90% 56 -237 1.30% 9.70%
Albany, NY 34.5 87% 2.00% 90 3,521 2.80% 13.70%
Chicago, IL 34.4 86% 1.80% 70 -32,998 1.30% 11.70%
Columbus, OH 34.2 85% 3.40% 61 2,507 1.40% 13.50%
Rochester, NY 34 85% 2.00% 86 1,330 3.20% 12.60%
Kansas City, MO 33.4 -1,491 1.30% 10.90%
Buffalo, NY 33.1 86% 2.60% 78 1,877 1.40% 17.00%
Boston, MA 32.6 79% 1.20% 63 -23,964 2.80% 12.20%
Cincinnati, OH 32.6 87% 3.90% 84 -360 1.30% 13.90%
Cleveland, OH 32.4 86% 2.50% 71 225 1.20% 9.50%
El Paso, TX 32.2 89 -24 1.80% 13.90%
Montgomery County, PA 31.4 83% 1.80% 66 6,685 0.80% 11.00%
Philadelphia, PA 30.4 86% 2.00% 64 -15,721 1.40% 10.10%
Akron, OH 29.6 87% 2.70% 83 2,029 1.20% 7.90%

 

Source: https://www.redfin.com/news/metros-recession-risk-housing-downturn-2022/

Housing Market Crash: What Happens to Homeowners if it Crashes?

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How Does a Market Crash Affect Homeowners?

If home values fall quickly, purchasers may find themselves with underwater mortgages, which means they must either stay in the house until the market recovers or sell and lose money. Homeowners owe more on their mortgages than their homes were worth and can no longer just flip their way out of their homes if they cannot make the new, higher payments. Instead, they will lose their homes to foreclosure and often file for bankruptcy in the process. The housing crash begins to take its toll on homeowners and the real estate market.

The housing market has encountered significant obstacles over the previous century, but none, with the exception of the Great Depression of 1929, contributed to the decline in home prices that occurred during the Great Recession of 2007. Neither the 20 percent interest rates of the early 1980s nor the devastation of the savings and loan sector in the early 1990s led to a similar drop in property values.

<<<Also Read: Will the Housing Market Crash in 2022 or 2023? >>>

It is also worth remembering that not all economic downturns chill the property market. In reality, throughout the 2001 recession, the housing market and house demand remained strong despite the economic slump. Throughout the course of the last century, the housing market has been subjected to a number of significant obstacles; but, with the exception of 1929's Great Depression, none of these problems have resulted in a decline in home values on par with that of 2007's Great Recession.

The interest rates of 20 percent in the early 1980s and the devastation of the savings and loan business in the early 1990s did not lead to a similar drop in the value of homes. It is also important to note that the housing market is not always affected negatively by recessions. Despite the fact that the economy was in a slump during the recession that began in 2001, the housing market and demand for homes continued to be healthy.

The previous housing bubble in the United States in the mid-2000s was caused in part by another bubble, this time in the technology industry. It was intimately tied to, and some belief was the cause of, the 2007-2008 financial crisis. During the late 1990s dotcom bubble, many new technology companies' stock was purchased quickly. Speculators bought up the market capitalizations of even firms that had yet to create earnings. By 2000, the Nasdaq peaked, and when the tech bubble burst, many high-flying equities plummeted.

After the dotcom bubble bust and stock market crisis, speculators fled to real estate. In response to the technology bust, the U.S. Federal Reserve lowered and maintained interest rates. This rush of money and credit met with government programs to encourage homeownership and financial market developments that improved real estate asset liquidity. More people bought and sold homes as home prices soared.

What Happened to Homeowners When The Housing Market Crashed?

In the next six years, the homeownership craze developed as interest rates fell and lending standards were relaxed. An increase in subprime borrowing began in 1999. Fannie Mae made a determined attempt to make home loans more accessible to borrowers with weaker credit scores and funds than are generally needed by lenders. The intention was to assist everyone in achieving the American dream of homeownership.

Since these customers were deemed high-risk, their mortgages had unconventional terms, such as higher interest rates and variable payments. 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. The US homeownership rate had increased to an all-time high of 69.2% in 2004.

During that same period, the stock market began to rebound, and by 2006 interest rates started to tick upward. Due to rising property prices, investors stopped buying homes because the risk premium was too great. Subprime lending was a major contributor to this increase in homeownership rates and in the overall demand for housing, which drove prices higher.

Borrowers who would not be able to make the higher payments once the initial grace period ended, were planning to refinance their mortgages after a year or two of appreciation. As a result of the depreciating housing prices, borrowers’ ability to refinance became more difficult. Borrowers who found themselves unable to escape higher monthly payments by refinancing began to default.

There was an increase in the number of foreclosures and properties available for sale as more borrowers defaulted on their mortgages. A drop in housing prices resulted, in lowering the equity of homeowners even more. Because of the fall in mortgage payments, the value of mortgage-backed securities dropped, which hurt banks' overall value and health. The problem was rooted in this self-perpetuating cycle.

By September 2008, average US property prices had fallen by more than 20% since their peak in mid-2006. Because of the significant and unexpected drop in house values, many borrowers now have zero or negative equity in their houses, which means their properties are worth less than their mortgages. As of March 2008, an estimated 8.8 million borrowers – 10.8 percent of all homeowners – were underwater on their mortgages, a figure that is expected to have climbed to 12 million by November 2008.

By September 2010, 23 percent of all homes in the United States were worth less than the mortgage loan. Borrowers in this circumstance have an incentive to default on their mortgages because a mortgage is normally non-recourse debt backed by real estate. As foreclosure rates rise, so does the inventory of available homes for sale.

In 2007, the number of new residences sold was 26.4 percent lower than the previous year. The inventory of unsold new houses in January 2008 was 9.8 times the sales volume in December 2007, the highest value of this ratio since 1981. Furthermore, about four million existing residences were for sale, with around 2.2 million of them being unoccupied.

Inability of Homeowners To Make Their Mortgage Payments

The inability of homeowners to make their mortgage payments was primarily due to adjustable-rate mortgages resetting, borrowers overextending, predatory lending, and speculation. Once property prices began to collapse in 2006, record amounts of household debt accumulated in the decades. Consumers started paying off debt, which decreases their spending and slows the economy for a prolonged period of time until debt levels are decreased.

Housing speculation using high levels of mortgage debt drove many investors with prime-quality mortgages to default and enter foreclosure on investment properties when housing prices fell.  As prices fell, more homeowners faced default or foreclosure. House prices are projected to fall further until the inventory of unsold properties (an example of excess supply) returns to normal levels. According to a January 2011 estimate, property prices in the United States fell by 26 percent from their high in June 2006 to November 2010, more than the 25.9 percent decrease experienced during the Great Depression from 1928 to 1933.

There were roughly 4 million finalized foreclosures in the United States between September 2008 and September 2012. In September 2012, over 1.4 million properties, or 3.3 percent of all mortgaged homes, were in some stage of foreclosure, up from 1.5 million, or 3.5 percent, in September 2011. In September 2012, 57,000 houses went into foreclosure, down from 83,000 the previous September but still far over the 2000-2006 monthly average of 21,000 completed foreclosures.

A variety of voluntary private and government-administered or supported programs were implemented during 2007–2009 to assist homeowners with case-by-case mortgage assistance, to mitigate the foreclosure crisis engulfing the U.S. During late 2008, major banks and both Fannie Mae and Freddie Mac established moratoriums (delays) on foreclosures, to give homeowners time to work towards refinancing In 2009, over $75 billion of the package was specifically allocated to programs that help struggling homeowners. This program is referred to as the Homeowner Affordability and Stability Plan.

Is There a Housing Bubble in 2022?

When a new generation of homebuyers enters the market, housing bubbles often arise naturally as a result of population expansion. As a result of this expansion, the demand for housing is expected to rise. Speculators, excellent economic circumstances, low-interest rates, and a wide variety of financing alternatives are all elements that will lead to an increase in home values. Increased demand drives up costs because of the building time lag. Any time housing prices diverge significantly from demographically-based organic demand, the broader economy is at risk of entering a state of crisis.

The COVID-19 pandemic did not slow home prices at all. Instead, it skyrocketed. In September 2020, they were a record $226,800, according to the Case-Shiller Home Price Index. According to the National Association of Realtors, the sales rate hit 5.86 million houses in July 2020, rising to 6.86 million by October 2020, surpassing the pre-pandemic record. Many people were taking advantage of the low-interest rates to purchase either residential properties or income-based flats that appeared to be inexpensive.

Home prices rose 18.8% in 2021, according to the S&P CoreLogic Case-Shiller US National Home Price Index, the biggest increase in 34 years of data and substantially ahead of the 2020s 10.4% gain. The median home sales price was $346,900 in 2021, up 16.9% from 2020, and the highest on record going back to 1999, according to the National Association of Realtors. Home sales had the strongest year since 2006, with 6.12 million homes sold, up 8.5% from the year before.

As speculators entered the market, home prices skyrocketed, exacerbating the housing market bubble. Now it reaches a time when home prices are no longer affordable to buyers. Rising prices make properties unsustainable, causing them to be overpriced. In other words, pricing increases. Low inventory, fierce competition, and large price increases have harmed purchasers since 2020, but quickly rising mortgage rates are making it much more difficult to find an affordable house in 2022.

As prices become unsustainable and interest rates rise, purchasers withdraw. Borrowers are discouraged from taking out loans when interest rates rise. On the other side, house construction will be affected as well; costs will rise, and the market supply of housing will shrink as a result. In contrast to a sudden jump, a sustained rise in interest rates will inflict little damage to the housing market in 2022.

Rising rent costs and mortgage rates, which increased from an average of just 3.2% at the beginning of the year to 5.81 percent by mid-June, have increased the cost of housing, pricing many individuals out of the market. This has resulted in a decline in house sales since an increasing number of individuals are unable to buy homes at the present inflated prices. According to NAR, existing-home sales declined for the fourth consecutive month in May, falling 3.4% from April and 8.6% from the same period last year.

Given the relative scarcity of available homes, the majority of analysts concur that a decline in housing prices is improbable. In addition to rising mortgage rates and subsequently less demand, a downturn might exert downward pressure on home prices. Despite many similarities to the housing bubble of 2008, the present housing market is quite different from it.

Homeowners with mortgages are not at a high risk of default, housing values are mostly determined by supply and demand rather than speculation, and lending rates continue to rise. Accordingly, the concept of a housing market crash is deemed improbable by a number of industry professionals. Many analysts believe that sky-high mortgage rates and the associated drop in housing demand will moderate the increase of home prices rather than result in any significant reversal in prices or a crash, which is generally defined as a widespread drop in home prices.

However, in the event that a more widespread recession hits the economy of the United States, the conditions might be created for a little decline in housing values. A deeper and more widespread economic downturn is likely to prompt a greater number of homeowners to sell their homes than would be the case otherwise. Because of the rise in available inventory, housing prices could experience some leveling out as a result.

It is also possible that a recession may just serve to limit the increase of property values, which is what many people anticipate would happen if interest rates continue to climb. However, it is still challenging to bring prices down because there are only limited properties available for purchase. The number of people applying for mortgages has already dropped by more than 50 percent since this time last year. It is not unrealistic to foresee a further decline in home demand given the impending implementation of additional rate increases. This will serve to rebalance the housing market, which is now squeezed, but it won't necessarily bring it to the point where it crashes.

References

  • https://en.wikipedia.org/wiki/Subprime_mortgage_crisis#
  • https://www.investopedia.com/articles/economics/09/subprime-market-2008.asp
  • https://www.forbes.com/advisor/mortgages/real-estate/will-housing-market-crash/
  • https://www.noradarealestate.com/blog/housing-prices/
  • https://investorplace.com/2022/06/what-would-cause-the-housing-market-to-crash-in-2022/
  • https://www.noradarealestate.com/blog/housing-market-predictions/

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