Despite the national housing market experiencing price declines from its all-time highs in the middle of 2022 with high-interest rates, analysts note that, given the current state of the market, a quick and dramatic housing market crash is unlikely.
The real estate market’s performance depends on housing demand and supply, mortgage interest rates, and unemployment. They currently show a time of decline in some markets, a rise in others, and a decrease in transactions compared to prior years overall – though unquestionably not a decrease as significant as that observed in the housing market meltdown of 2008–2009.
The home market would be under pressure during a recession, which analysts believe is imminent. Mortgage lending standards may be tightened to prevent cascading effects on the housing market, but homeowners with current mortgages are still seen as stable, and many of them are still unwilling to move out soon.
Home Prices Can Decline Without a Housing Crash
While a minor market correction may help prices better match what purchasers – including sellers shopping for their next home – can afford, a decline in housing prices may seem like the last thing a house seller would desire.
The rise in mortgage interest rates that started in mid-2022 is a significant obstacle to reaching that affordability criterion. Mortgage rates frequently rise or fall due to the Federal Reserve’s operations, even though they are nominally independent of the federal funds target rate established by the central bank. In a concerted effort to control inflation, the federal funds’ target rate has been increased several times in the past year. Midway through June, the Fed most recently decided against raising the target rate, but at least two more rate increases are anticipated before the year is out.
In October and November 2022, the average interest rate on a 30-year fixed-rate mortgage exceeded 7% but decreased to just under 6% in January. Since March, the average interest rate has fluctuated slightly, moving up to 7% before falling back down. According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage as of June 15 is 6.69%.
Moving becomes downright unappealing, with many homeowners who bought or refinanced between 2020 and mid-2022 tied into a mortgage interest rate of roughly 3%.
Since interest rates first increased in 2022, there has been a significant decline in the number of home transactions. Redfin data shows that fewer houses were sold between May 15 and June 11 than at the same time last year by more than 17%.
However, any decline in property prices may be manageable because homeowners can now wait out rising interest rates and economic uncertainties.
A Realtor.com poll of 1,200 recent or future house sellers found that up to 82% of homeowners felt “locked in” to their current mortgage. The results were released in April.
Some buyers returned to the market once mortgage rates eased in late March and early April, and they have since come back as we enter the regular homebuying season. According to the senior economist for Zillow Orphe Divounguy, the spring homebuying season experienced a surge in activity as usual. Many purchasers have adapted to rising mortgage rates. However, home sellers have refrained.
As a result, although the number of homes entering contracts is still lower than it was in 2022, it is approaching parity. According to Zillow, the number of new pending listings decreased by 21% in May compared to May 2022.
Additional economic instability may cause more buyers to stop looking for a home and more sellers to remain in their current residences. In that scenario, annual home price declines might continue, although most likely on a modest scale and without the risk of a crash.
Is the 2008 housing market crash different?
Any time the economy is uncertain, owning a home can be frightening. This is especially true if you have recent memories of the Great Recession and the housing market crisis of 2008 and 2009.
When adjustable interest rates surged in the early years of the twenty-first century due to predatory lending practices, many homeowners faced foreclosure. Unemployment also increased the number of properties in foreclosure.
The housing market was artificially stimulated by giving mortgages to people who couldn’t afford to buy and maintain homes, and the economic slump also caused a sharp decline in buyer demand. As a result, home values drastically decreased.
Reynolds says that the current scenario is substantially different compared to the Great Recession. This time, he claims, “we don’t see a lot in the way of excess.”
The issue of supply is another significant distinction between the housing crash and the market now. Before 2008, there had been an overwhelming amount of construction, which meant that when demand fell, large house developments lay empty.
By 2023, housing has yet to catch up to the low rate of construction versus household formation since the Great Recession.
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Since the Great Recession, laws and regulations have been in place to protect today’s homeowners against predatory loans. There are still more qualified buyers looking for houses than homes for sale, even while high home prices and rising interest rates have increased the entire cost to buy a home and made homeownership unattainable for many otherwise would-be homebuyers.
Reynolds claims that even though a recession is anticipated in the future, a crash is currently unlikely given the sum of all these reasons. He adds, however, that instability or estimation mistakes that were only apparent after a decline in GDP can also become apparent during a recession. Therefore, economists and strategists must be prepared for a few surprises when a recession arises.
Reference: When Will the Housing Market Crash?