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  • Writer's pictureJay A. Hines

Current Housing Market...will it Crash or continue to Thrive?

The housing market has always been a topic of interest for both buyers and sellers. With its potential to make or break financial stability, it's no wonder people are concerned about its future. In this article, we will take a deep dive into the current state of the housing market, analyze the factors that could lead to a crash, and explore the reasons why experts believe it will continue to thrive.

The Housing Market: A Rollercoaster Ride

Over the past few years, the housing market has experienced significant ups and downs. After a record-breaking run, with mortgage rates plummeting to all-time lows and home prices soaring to new heights, the U.S. housing market finally started slowing down in late 2022. Mass layoffs in mortgage companies and predictions of a "housing recession" had many worried about a potential crash. However, something unexpected happened – home values started rising again.

According to the latest Case-Shiller home price index, housing prices have increased for five consecutive months. The National Association of Realtors (NAR) also reported that more than half of U.S. metro areas registered home price gains in the second quarter of 2023. Lawrence Yun, the Chief Economist of the NAR, boldly stated that the housing recession is essentially over.

The Impact of Mortgage Rates and Housing Supply

Despite soaring mortgage rates, which reached their highest level in more than 20 years in August, home values have remained steady. The main reason behind this is the lack of housing supply. Bidding wars have returned, and inventories remain frustratingly tight. Rick Arvielo, the head of mortgage firm New American Funding, confidently states that house prices will not decline due to the scarcity of inventory.

Skylar Olsen, the chief economist at Zillow, agrees with Arvielo's assessment. She forecasts that home prices will continue to rise well into 2024, which is welcome news for sellers but not so great for first-time buyers struggling to enter the market. In Olsen's words, "We're not in that space where things are suddenly going to be more affordable."

Potential Market Correction: Modest but Not Severe

While a rapid rise in mortgage rates and a sharp slowdown in home sales have some bracing for the worst, housing economists and analysts believe that any market correction is likely to be modest. It's important to note that no one expects price drops on the scale of the declines experienced during the Great Recession.

The differences between the current market and the market before the Great Recession are significant. Homeowners today have stronger personal balance sheets, with stellar credit, substantial home equity, and fixed-rate mortgages locked in at rates well below 5 percent. Builders also remember the Great Recession and have been cautious about their pace of construction, resulting in an ongoing shortage of homes for sale. Yun affirms that the repeat of a 30 percent price decline is highly unlikely due to the lack of supply.

Is the Housing Market Going to Crash?

With memories of the housing crash in 2007 still fresh, many buyers and homeowners fear a similar scenario. However, housing economists provide compelling reasons why a crash is unlikely. Let's explore these reasons:

1. Low Inventories

The National Association of Realtors reports a 3.3-month supply of homes for sale in July, a significant increase from the 1.7-month supply in early 2022. This ongoing lack of inventory means that buyers have limited options and must bid up prices, making a price crash unlikely.

2. Slow Pace of Construction

After the Great Recession, homebuilders scaled back and never fully recovered to pre-2007 levels. The slow pace of construction, coupled with difficulties in acquiring land and regulatory approvals, means that there won't be an overabundance of new homes flooding the market. This cautious approach to construction mitigates the risk of a crash.

3. Demographic Trends

There is strong demand for homes from various groups. Many existing homeowners realized during the pandemic that they needed larger spaces, particularly with the rise of remote work. Millennials, a large demographic group in their prime buying years, are also seeking homeownership. Additionally, Hispanics, a growing demographic, are keen on becoming homeowners. These demographic trends contribute to the stability of the housing market.

4. Strict Lending Standards

Unlike in 2007 when "liar loans" were prevalent, lenders today have imposed strict standards on borrowers. Mortgages are offered to borrowers with excellent credit, and income documentation is required. The robust lending standards ensure that buyers can afford the homes they purchase, reducing the risk of a crash.

5. Muted Foreclosure Activity

During the housing crash, foreclosures flooded the market and depressed prices. However, the situation is different now. Most homeowners have a comfortable equity cushion in their homes, and foreclosure activity is minimal. Lenders have also been more cautious about filing default notices, leading to record-low foreclosure rates. The lack of distressed properties in the market contributes to the stability of home prices.

Considering these factors, it becomes clear why experts believe the housing market is not on the verge of crashing. While prices may plateau and affordability remains a concern, the conditions for a severe crash are not currently present.

Conclusion: A Stable Future for the Housing Market

Despite concerns and predictions of a housing market crash, the evidence suggests that the market will continue to thrive. Low inventories, a slow pace of construction, favorable demographic trends, strict lending standards, and muted foreclosure activity all contribute to the stability of the market. While price growth may slow down and affordability remains a challenge, a repeat of the Great Recession is highly unlikely.

Buyers and sellers should approach the housing market with caution, but not alarm. The rollercoaster ride of the housing market is part of its nature, and with careful planning and knowledge, individuals can navigate the market successfully. Ultimately, the current state of the housing market indicates a stable future rather than an impending crash.

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