Is U.S. housing market going to crash?

The US real estate market has been booming in recent years, with prices steadily rising in many parts of the country. However, there are concerns that this growth will not be sustainable, and that a market correction, if not a crash, will occur in the future.

The US housing market is finally slowing down after a record-breaking move that saw mortgage rates drop to all-time lows and house prices soar to new highs. Home sales will fall for the 12th straight month through January 2023, and home prices appear to have peaked. After the summer of 2022, the price is going down every month. January home prices were up 1.5% year-over-year, but from February 6 to March 5, the median home price was $353,000, down 1.5% year-on-year. The easing of mortgage rates in January has brought some buyers back into the market – Zillow’s January 2023 market report shows that new outstanding listings for January are just 20 from January 2022. % down, an improvement compared to November, when pending new listings were down. 38% year-on-year. Higher volatility in mortgage rates could drive some buyers out of the market.

However, the current homeowner doesn’t seem ready to sell yet. The supply of housing in the market, which was the main cause of rising house prices even before the pandemic, remains low as builders shelve major development plans. Home prices will eventually fall year over year due to a lack of demand, but the housing bubble may not necessarily collapse as a result. Reynolds hypothesises that a return to equilibrium, where houses are fairly priced to be affordable to buyers, is more in line with what he anticipates.

According to Jarred Kessler, founder and CEO of Easy Knock, a firm that offers an alternative to home equity loans, markets that had higher home price growth in recent years are more likely to face larger declines as home values correct to meet with long-term demand. He predicts that locations where prices rose sharply and more quickly than in other areas, such as Austin, Texas; Nashville, Tennessee; Miami; and Phoenix; are more likely to experience a decrease in home prices of 10% or more.

A recession is defined as at least two quarters in a succession of negative GDP growth, and it is frequently characterised by higher unemployment and lower overall consumer spending.

The housing market slows down as a result of the financial hardship people experience during a recession. Homebuyers may put off their search if they are concerned about being laid off, and there may be a slight increase in foreclosure activity as higher unemployment increases the number of people who are unable to pay their mortgage.

Yet, after the property market’s activity slows down sufficiently, mortgage interest rates fall to the point where purchasers return, looking for a good offer. Contrary to the Great Recession, a rise in housing market activity aids in the recovery of the economy.

The majority of panellists (56%) believe that within the upcoming year, there will be a dramatic movement in favour of buyers, making 2023 the year of the buyer. Several reasons, including sky-high mortgage rates that are reducing competition among home buyers, are to blame for this move. As potential homebuyers who are priced out switch to renting, this trend is anticipated to put more pressure on the rental market.

The National Association of Realtors reports that there was a 2.9-month supply of homes for sale in January, indicating that inventories are still relatively low. The quantity was as low as a meagre 2.0-month supply in February 2022. Why many purchasers continue to be forced to bid up prices is due to the continuous paucity of inventory. Additionally, it suggests that a price crash in the short term is just not possible given the current state of supply and demand.

The pace of construction fell short of demand: After the previous recession, homebuilders drastically reduced their output and never fully recovered to pre-2007 levels. They can no longer purchase land or obtain regulatory clearances quickly enough to meet demand. Although they are building as much as they can, it doesn’t seem realistic that they would overbuild as they did 15 years ago. Greg McBride, CFA, Bankrate’s top financial analyst, claims that increased demand and a shortage of supply are the primary causes of the price increase. “Supply and demand can balance out again as builders put more houses on the market, more homeowners opt to sell, and potential purchasers are priced out of the market. It won’t happen immediately.

New buyers are being created by demographic trends: Homes are in high demand across the board. Because to the development of working from home, many Americans who already had homes during the epidemic decided they wanted larger homes. The millennial generation is enormous and at a perfect age for purchasing. Also, a young, expanding demographic that is eager to acquire a property is Hispanic.

Standards for lending are still rigid: “Liar loans,” in which borrowers were not required to provide proof of their income, were widespread in 2007. Regardless of credit history or down payment amount, lenders gave mortgages to the majority of people. These days, lenders have strict requirements for borrowers, and the majority of people applying for mortgages have outstanding credit. According to the Federal Reserve Bank of New York, the average credit score for mortgage borrowers in the fourth quarter of 2022 was a high 766. According to McBride, “if lending standards relax and we return to the wild, wild west days of 2004–2006, then that is a whole different beast.” “We worry if prices start to rise due to the inflated purchasing power of lax lending rules.”

The number of foreclosures has decreased: In the years following the housing meltdown, millions of foreclosures flooded the market, driving down prices. It’s not like that anymore. The majority of homeowners have ample equity in their properties. As a result of lenders avoiding serving default notices during the worst of the pandemic, the number of foreclosures fell to all-time lows in 2020.

All of this points to the conclusion that property prices are still outpacing people’s ability to pay them. But this boom shouldn’t go bust, should it?

A small increase in unemployment would be OK, but a bottom fallout might be a sign that the housing market is in trouble. When there are too many people without jobs, distressed home sales increase and foreclosures are more likely to occur.

Since the onset of the epidemic, the availability and cost of supplies have been a persistent problem for builders, who have been beset by labour shortages for a decade. Builders are slowing down, and fewer permits are being issued for the construction of new homes as a result of the decline in buyer activity. This might prolong the housing scarcity and exacerbate the supply-demand gap.

 Although housing markets have significantly cooled, demand hasn’t vanished and is still strong in many areas, partly because there aren’t enough houses on the market. The absence of any consumer demand would indicate a problem.

For the ordinary homebuyer, now is not the moment to purchase real estate with the idea that the value will increase twofold in a short amount of time. Kessler suggests making a purchase with the intention of staying for at least five years. Don’t worry about the noise between now and then, adds Kessler, if you can afford to live there.

Because of all the reasons discussed above it is save to say that the housing market is not going to crash yet as of now.

Arsal Nadeem Khan
Arsal Nadeem Khan
Student BS Economics NDU