February 24, 2024
“You’re not going to see house prices decline,” says Rick Arvielo, head of mortgage firm New American Funding. “There’s just not enough inventory.”

Jeff Ostrowski | Bankrate.com (TNS)

After a record-breaking run that saw mortgage rates plunge to all-time lows and home prices soar to new highs, the U.S. housing market finally started slowing in late 2022. Mortgage companies engaged in mass layoffs, real estate economists lamented a “housing recession” and home prices seemed poised for a correction.

But a strange thing happened on the way to the housing crash: Home values started rising again. In fact, housing prices have increased for four months in a row, according to the latest Case-Shiller home price index. In another reflection of ongoing price increases, the National Association of Realtors (NAR) says more than half of U.S. metro areas registered home price gains in the second quarter of 2023.

While NAR reports that median sale prices of existing homes have declined year-over-year for five consecutive months through June, that comes with an asterisk. Home prices in June 2023 were down slightly compared to June 2022 — but this June’s median price of $410,200 was still the second-highest monthly number ever recorded by NAR, outpaced only by last June’s $413,800.

Home values have held steady even as mortgage rates have topped 7 percent. The culprit is a lack of housing supply. Bidding wars have returned, and inventories remain frustratingly tight. “You’re not going to see house prices decline,” says Rick Arvielo, head of mortgage firm New American Funding. “There’s just not enough inventory.”

Skylar Olsen, chief economist at Zillow, agrees about the supply-and-demand imbalance. Her latest forecast says home prices will keep rising into 2024 — welcome news for sellers but not so great for first-time buyers struggling to become homeowners. “We’re not in that space where things are suddenly going to be more affordable,” Olsen says.

Still, a rapid rise in mortgage rates and a sharp slowdown in home sales has some bracing for the worst. After the June 14 Federal Reserve meeting, Fed Chairman Jerome Powell told reporters he was keeping a close eye on the housing market. “Housing is very interest-sensitive, and it’s one of the first places that’s either helped by low rates or held back by higher rates,” Powell said in the press conference. “We’re watching that situation carefully.”

Regardless, housing economists and analysts agree that any market correction is likely to be a modest one. No one expects price drops on the scale of the declines experienced during the Great Recession.

Will the market crash?

The last time the U.S. housing market looked so frothy was back in 2005 to 2007. Back then, home values crashed with disastrous consequences. When the real estate bubble burst, the global economy plunged into the deepest downturn since the Great Depression. Now that the housing boom is threatened by soaring mortgage rates and a potential recession — Bankrate’s most recent expert survey put the odds at 59 percent — buyers and homeowners are asking a familiar question: Is the housing market about to crash?

Housing economists agree that prices could fall further, but the decline won’t be as severe as the one homeowners experienced during the Great Recession. One obvious difference between now and then is that homeowners’ personal balance sheets are much stronger today than they were 15 years ago. The typical homeowner with a mortgage has stellar credit, a ton of home equity and a fixed-rate mortgage locked in at a rate well below 5 percent — in fact, according to a June Redfin study, 82.4 percent of all current homeowners are locked in below the 5 percent mark.

What’s more, builders remember the Great Recession all too well, and they’ve been cautious about their pace of construction. The result is an ongoing shortage of homes for sale. “We simply don’t have enough inventory,” Yun says. “Will some markets see a price decline? Yes,” he says. “[But] with the supply not being there, the repeat of a 30 percent price decline is highly, highly unlikely.”

Existing home prices

Economists have long predicted that the housing market would eventually cool as home values become a victim of their own success. After decreasing year-over-year in February for the first time in more than a decade, the median sale price of a single-family home showed a 0.9 percent yearly decline in June, per NAR.

Overall, though, home prices have risen far more quickly than incomes. That affordability squeeze is exacerbated by the fact that mortgage rates have more than doubled since August 2021.

Prices to hold strong

While the housing market is indeed cooling, this slowdown doesn’t look like most real estate downturns. Home sales have plunged, and inventories of homes for sale have fallen sharply, too. Homeowners who locked in 3 percent mortgage rates a couple years ago are declining to sell — and who can blame them, with current rates above 7 percent? — so the supply of homes for sale is even tighter. As a result, this correction will be nothing like the utter collapse of property prices during the Great Recession, when some housing markets experienced a 50 percent cratering of values.

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Yun says high-priced regions such as California are most vulnerable to a downturn in prices. In fact, that is already playing out in notoriously pricey markets like San Francisco, where the median sale price in June was down 8.8 percent year-over-year, Oakland, which saw an 11.3 percent drop, and Los Angeles, where the decline was 7.1 percent, according to Redfin data.

However, he says, “Even in markets with lower prices, multiple-offer situations returned in the spring buying season following the calmer winter market.” Overall, Yun expects national prices to remain flat.

5 reasons not to expect a crash

Housing economists point to five compelling reasons that no crash is imminent.

—Inventories are still very low: The National Association of Realtors says there was a 3.1-month supply of homes for sale in June. Back in early 2022, that figure was a tiny 1.7-month supply. This ongoing lack of inventory explains why many buyers still have little choice but to bid up prices. And it also indicates that the supply-and-demand equation simply won’t allow a price crash in the near future.

—Builders didn’t build quickly enough to meet demand: Homebuilders pulled way back after the last crash, and they never fully ramped up to pre-2007 levels. Now, there’s no way for them to buy land and win regulatory approvals quickly enough to quench demand. While they are building as much as they can, a repeat of the overbuilding of 15 years ago looks unlikely. “The fundamental reason for the run-up in price is heightened demand and a lack of supply,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “As builders bring more available homes to market, more homeowners decide to sell and prospective buyers get priced out of the market, supply and demand can come back into balance. It won’t happen overnight.”

—Demographic trends are creating new buyers: There’s strong demand for homes on many fronts. Many Americans who already owned homes decided during the pandemic that they needed bigger places, especially with the rise of working from home. Millennials are a huge group and in their prime buying years. And Hispanics are a growing demographic also keen on homeownership.

—Lending standards remain strict: In 2007, “liar loans,” in which borrowers didn’t need to document their income, were common. Lenders offered mortgages to just about anyone, regardless of credit history or down payment size. Today, lenders impose tough standards on borrowers — and those who are getting a mortgage overwhelmingly have excellent credit. The median credit score for mortgage borrowers in the the second quarter of 2023 was a high 769, the Federal Reserve Bank of New York says. “If lending standards loosen and we go back to the wild, wild west days of 2004-2006, then that is a whole different animal,” says McBride. “If we start to see prices being bid up by the artificial buying power of loose lending standards, that’s when we worry about a crash.”

—Foreclosure activity is muted: In the years after the housing crash, millions of foreclosures flooded the housing market, depressing prices. That’s not the case now. Most homeowners have a comfortable equity cushion in their homes. Lenders weren’t filing default notices during the height of the pandemic, pushing foreclosures to record lows in 2020. And while there has been a slight uptick in foreclosures since then, it’s nothing like it was.

All of that adds up to a consensus: Yes, home prices are still pushing the bounds of affordability. But no, this boom shouldn’t end in bust.


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