Is the housing market going to crash?

Is the housing market going to crash

These days, both home buyers and home sellers are wondering where home prices are headed. Buyers want to know if home prices will go down before they buy. Sellers need to gauge how aggressively to price their home now to avoid possible markdowns in the future. But will the housing market crash? Like everything in real estate, things are more complicated than they might appear on the surface.

Interest rates are up, but housing stock is still limited

You would think that sky high interest rates would cause the housing market to dip significantly. Going from a 3% mortgage rate last year to a 6.5% rate now in less than a year would give anyone whiplash, and certainly is enough to make a first time home buyer reconsider! After all, a $500,000 home at 6.5% costs a whopping 27% more per month than a 3% mortgage at the same home price. That’s enough to price someone out of the market.

But there are several factors that are keeping home prices up. Namely, lack of inventory. Unlike in the 2008 downturn, people aren’t experiencing foreclosures. Because of big rises in home values over the past five years, homeowners have more home equity. Many homeowners took advantage of historically low interest rates earlier, and are staying put. While a recession is predicted and inflation is taking a major toll on households, many people are able to, and choosing to, stay in their homes.

To illustrate this phenomenon, single family home sales are down 28% from October 2021, according to the National Association of Realtors (NAR).

So, even though interest rates are up and less people are able to buy, there aren’t that many homes on the market, preventing a massive decline in home prices.

Home prices are down in some parts of the market, but not in others

Real estate prices are often very “hyper-local” – some areas have seen huge increases in the past few years, and others, not so much. When prices fall, they also fall at different rates in different markets. And there’s often a difference between the high end of the market and the middle and low end. While single family modest homes are in demand, there has been some softening in certain markets in the higher end.

For example, Austin saw its luxury market plummet 38% over the summer of 2022.

Refin recently did an analysis predicting that Riverside, CA, Boise, ID, Phoenix, AZ and Tampa, FL were at risk of steeper price declines. Areas where people moved during the pandemic saw steep price increases, and are now expected to fall, as demand wanes.

But according to NAR, home appreciation nationwide was up 8% from August 2021 to August 2022. This shows that many areas are still in enough demand to keep overall prices higher.

A tale of two buyers

There are also two types of buyers emerging. One is a homeowner who built up a lot of home equity due to rising home prices, who is selling a home and putting a very large down payment down on a new home to offset the rising interest rates. Similar to this type of buyer are all-cash buyers, excited to jump in and swoop up bargains, without having to deal with high mortgage rates at all.

Then you have the rest of the buyers, who have to make the higher interest rates work. And also contend with tightening lending criteria, as banks hedge against defaults.

The phrase “date the rate, but marry the house” has emerged in the mortgage industry. Which means, accept the (hopefully) temporary high interest rate, but lock in the home purchase, then refinance when rates go down.

This makes for a market with some buyers taking advantage of current conditions and some having to make hard decisions about carrying a higher than comfortable monthly payment with the hopes that rates go down in the future.

So, what’s the conclusion? Will the housing market crash?

You can see that the picture is complicated. With inventory low, a plethora of all-cash or high down payment buyers on the scene, many people choosing to stay put and high interest rates, it’s a mixed picture. And, also many new people are starting to buy their first houses, like millennials who have been saving up. Add in the fact that renting is less expensive than owning in certain areas and there are many dynamics at play.

Given the fact that there are serious constraints on the vast majority of home buyers – namely inflation, recession and inflationary risks, coupled with a very tight inventory situation, my best guess is that overall, home prices will decrease 5 – 10% in the coming 6 to 12 months. But we could also see zero decrease in home prices if inventory remains low. Like everything, it comes down to the fundamentals of supply and demand in the market.

But, because of the hyper-locality of real estate, it’s best to look at data sources in the area you’re interested in. This way, you can be informed about the state of real estate where it matters most: your area and your market.