When Will the Housing Market Crash? | Real Estate

With the national median home price surpassing $400,000 since March 2023 and just 37.7% of existing homes sold during the fourth quarter of 2023 deemed affordable to families earning the median income of $96,300, it’s certainly understandable that would-be homebuyers might be hoping for a price crash in order to grab their first rung on the housing ladder. Similarly, existing owners might be trying to time the market to maximize their equity gains versus risking a decline.

The average 30-year, fixed-rate mortgage interest rate reached more than 7% in October and November 2022 but dropped close to 6% in January 2023. The average interest rate has shown some volatility since March 2023, climbing toward 7% again, then dropping back down and going up again. In early 2024, the average rate for a 30-year, fixed-rate mortgage was 6.77 percent as of Feb. 15, according to Freddie Mac.

With many homeowners who purchased or refinanced between 2020 and mid-2022 locked into a mortgage interest rate somewhere around 3%, moving becomes downright unattractive.

Interested parties certainly keep searching for signs of a shift in the market online: According to a Google trends summary from the start of 2004, although recent interest in a “housing market crash” is about one-fifth of what it was in July 2022 when mortgage rates spiked and prices softened, it’s still double the average during this 20-year term and exponentially higher than during the financial crisis. However, what’s likely not being accurately conveyed in these online searches is that while the economy is seemingly on the mend, the same cannot be said of the housing market.

In a more normal housing market, when less than a certain percentage of families can afford to buy, sales prices should adjust accordingly. Today, however, with so many existing homeowners locked into their existing low mortgage rates of 4% to 5% or lower, the disincentive to move elsewhere has kept home sales – and prices – in a semifrozen suspended animation.

That’s also why housing affordability levels tracked by the National Association of Home Builders have refused to budge. The latest figure hovers near a 14-year low of 37.4%, less than half of the 78.8% noted in early 2012 and 28 percentage points less than the last peak of affordability, 66% in early 2020.

In general, a housing market crash is defined by a rapid decline in values leading to a peak-to-trough fall of 20% or more, which is what happened in the aftermath of the financial crisis of 2007-08. In that case, rising foreclosures and plummeting demand by potential buyers, wishing to avoid a “falling knife’” in prices, continued to feed on each other. It wasn’t until 2012 that home prices stabilized, helped in part by institutional investors deciding to enter the single-family rental market to address the surging demand by households who still needed a place to live.

Today, the combination of this lock-in mortgage effect for homeowners, more millennials purchasing homes and population growth returning to pre-pandemic norms will continue to add to the pent-up housing deficit, which was recently estimated to be 4 million units by Bank of America analysts. As long as demand exceeds supply to this extent, a housing crash is unlikely, absent economic shocks including surges in employment, delinquencies and foreclosures.

However, even if economic trends are not presently indicating a potential pricing crash, there is another sleeping giant that could upend the housing market not just in the United States, but throughout the world: climate change. While many Americans may consider the rising costs of more intense heat waves, storms, wildfires, floods and droughts to be unfortunate but currently irrelevant to their own lives, for insurance companies it’s become a very real threat.

According to Toni Moss, CEO of the advisory firm AmeriCatalyst and an expert in global housing finance, in 2022 insurance losses in the U.S. exceeded $100 billion, of which $63 billion was paid out in claims. For 2023, the National Centers for Environmental Information (a branch of the National Oceanic and Atmospheric Administration) counted 28 confirmed natural disaster events related to weather and climate, with losses over $1 billion each.

As risk transfer agents more than risk takers, the threat faced by insurance companies is increasingly being shared with homeowners in states ranging from California through Florida in the form of higher premiums. Some are exiting the market completely. Consequently, it’s possible that even absent economic factors such as job losses, home prices in certain areas with heightened climate change risks could face considerable declines to compensate for the higher costs of finding insurance or, for those without a mortgage in place, choosing to remain self-insured.

In order to get a comprehensive overview of the threats and opportunities posed by climate change to the housing market, Moss is planning a two-day “Going to Extremes” conference in April in Washington, D.C. Featuring speakers from the worlds of housing data, insurance, finance, higher education, home building, real estate investment, nonprofit groups, federal government agencies and climate science, the goal of this workshop-oriented event is to not just identity and quantify these risks, but also offer strategies on how to adapt and improve resiliencies as the global climate becomes increasingly unstable. Stay tuned here for updates on this conference, as I will attend on behalf of U.S. News & World Report.

One easy way to stay informed on the various metrics impacting the housing market is the U.S. News Housing Market Index. Each month, this tool tracks a wide array of data points to provide a simple yet comprehensive way to review the health of not just the national housing market, but also for more than 50 metropolitan statistical areas (MSAs). The index also assigns single value points to these data points grouped by demand, supply and financial categories at the national and MSA levels.

For December 2023, while the U.S. Housing Market Index fell 4.4 points year-over-year to 59.9, it was still the highest level since July. Most of the annual decline was due to a slump in demand, while both supply and financial conditions improved.

Over the last year, the demand component of the HMI plummeted 15.3 points to 53.2. Although unemployment remains low and recent job growth continues to perform above expectations, rising but relatively subdued consumer sentiment and higher prices for both buying and renting homes have impacted demand.

The supply component of the HMI rose 3.3 points to 51.6 year-over-year due to a slight improvement in the rental vacancy rate, increases in home builder confidence related to lower inflation for construction costs and an increase in filling open construction jobs. 

For the 12-month period ending in December 2023, the financial component of the HMI slipped 1.2 points to 75.0, primarily due to rebounding mortgage rates and worsening affordability levels for purchasing a home.

The Demand HMI subindex includes government data on employment, unemployment, household growth, consumer sentiment from the University of Michigan, median home sales prices from Redfin, and observed, smoothed housing rental prices from Zillow.

Even against the backdrop of higher interest rates engineered by the Federal Reserve, the U.S. job market continues to outperform expectations. During the 12-month period ending in December, over 3 million new jobs were created, rising 2%. This growth only adds to the pent-up demand for more housing.

When consumers aren’t feeling positive about their personal financial conditions, they’re less likely to splurge on large-ticket items such as homes and cars. While sentiment does tend to closely track economic conditions, since the end of the pandemic, it’s instead been mostly stuck in a “vibecession” as the surge in inflation, while subsiding, continues to mean significantly higher prices for many daily essentials versus pre-pandemic days.

Fortunately, since last hitting a low of 59.0 on a 1-100 scale in May, the University of Michigan’s Index of Consumer Sentiment rebounded to 69.7 by December, rising nearly 10 percentage points year-over-year. It has extended this rebound through February, improving nearly another 10 points to 79.6.

Even with a national birth rate below the level needed to replace or grow the population, since the end of the pandemic a sharp decline in deaths and rebounding immigration levels have helped the country’s growth rebound to pre-pandemic norms. During the 12 months prior to December 2023, the country added more than 1.6 million new households, adding to the pent-up demand for housing.

While over two-thirds of this population growth was due to overall immigration, statistics from the U.S. Department of Homeland Security report more than 3.2 million encounters with immigrants lacking permanent legal status for the fiscal year ending in September 2023, up nearly 64% from 2021 levels. Depending on how many of these immigrants avoid participating in Census Bureau surveys, it’s possible that the estimates for household growth may even understate the pent-up demand for housing.

Median Sales Price & Rent Price

After last peaking at more than $426,000 in June 2023, the median sales price for a home in the U.S. slid to about $404,000 by December. Even with that decline, December’s median price is up 4% year-over-year. For rental households, national rents last peaked at $1,968 per month in October. While they have since declined slightly to $1,957, they’re still up 3.3% year-over-year.

The Supply HMI includes government data on housing supply, rental vacancy rates, construction costs, construction jobs, builder sentiment from the National Association of Home Builders and architectural billings from the American Institute of Architects.

Housing Supply & Rental Vacancy

If four to six months represents a balanced market between supply and demand, the national market for home sales has been undersupplied for several years. According to Redfin statistics, January 2019 was the last time there was more than four months of supply, and it hasn’t exceeded six months since February 2012. With the level of home inventory for sale continuing to range mostly from 2 to 3 months over the past year, for now a housing price crash is nowhere to be seen.

For the rental home market, a vacancy rate of about 5% marks the split between a landlord’s market or a tenant’s market. Throughout 2023, the national vacancy rate ranged from 6.3% to 6.6%, giving renters a small amount of breathing room to find the right place and perhaps to negotiate rent or request a special such as a period of free rent in exchange for a long-term lease. Notably, national vacancy levels last peaked at 11.1% in 2009, and since then developers have generally been careful about adding excess supply to the marketplace.

Builder Sentiment, Construction Costs and Construction Jobs

One of the biggest boosts to the increase in the Supply HMI over the last few months has been a recent surge in homebuilder confidence, which rose 6 points year-over-year through December and increased to 48 in February, or the highest rate since August.

Accompanying this improving confidence has been a decline in the share of builders cutting home prices, falling to 25% in February from 36% in December. Builders also report offering fewer sales incentives, such as interest rate buydowns, although 58% of them continued to do so in February.

The index of residential construction costs, which peaked at 190.8 in November, slipped to 190.1, but rose just 0.2% year-over-year as material costs have softened. Construction jobs continue to rise and were up 7.7% year-over-year through December as builders offer higher wages to attract more workers into the industry. While this should help boost supply, given other constraints on building including local zoning laws and finding land suitable for development, addressing the pent-up demand for housing is neither an easy nor a quick fix.

The Financial HMI includes government data on interest rates and access to credit, delinquencies and foreclosures from Black Knight, and ratios of monthly mortgage and rental payments to per capita incomes calculated by the index. Monthly mortgage payments assume conventional financing with 20% down at the average monthly 30-year fixed rate reported by Freddie Mac.

Price to Income and Rent to Income

After peaking at nearly 41% in October, the U.S. ratio of buying a home with 20% down over a 30-year term to per-capita income fell to 36.4% by December. This ratio, while up from 34.8% in December 2022, is still significantly higher than the 19.7% level noted in March 2021 when mortgage rates were just over 3%.

For renters, after peaking at 34.3% July and August 2023, the ratio of monthly rent to per-capita income fell to 33.8% and is down slightly year-over-year as incomes have risen faster than rents. Compared with homebuyers, for renters the share of per-capita income spent on housing costs, while certainly rising since the last low of 25.3% in March 2021, has remained much more stable and typically ranged from 33% to 35% throughout 2022 and 2023.

Average mortgage rates for the traditional 30-year fixed-rate program, which dipped as low as 2.7% in December 2020, jumped quickly throughout 2022 and 2023 as inflation rose and mortgage bond investors had more options to consider.

The result of these sharp increases in a relatively short period of time has meant a semifrozen housing market with the fewest annual existing home sales throughout 2023 since 1995. While 30-year mortgage rates have since fallen from their most recent average monthly high of 7.62% in October, by December they had still risen by 46 basis points year over year to 6.82%.

Since then, these average rates have mostly ranged from 6.6% to 6.8%, and if the housing market is not predicted to rebound robustly until rates fall below the 6% level, most homes listed for sale will be the result of job changes, downsizing, the need for more space or the “three Ds”: death, divorce and debt.

Delinquencies and Foreclosures

Due largely to the lock-in effect of mortgages with rates mostly under 5% and low unemployment levels, the number of homeowners in financial distress also remains low. National mortgage delinquencies averaged just 0.4% to 0.5% in 2023, while the rate of foreclosures, although rising since August to 3.6% in December, is less than half the last peak of 7.8% in March 2020. Moreover, the 24,000 foreclosure starts in December marked an 18-month low in new activity and total active foreclosures were the lowest since March 2022.

New permits for single-family homes totaled nearly 65,000 in December, up 27.3% year-over-year as the nation’s homebuilders gear up to supply new housing as a sort of safety valve for the semifrozen market for existing home sales. Whereas new homes typically supply about 10% of homes for sale, in recent months that share has risen to 30%. In addition, more single-family built for rent homes are going up to cater to renters who prefer lower-density suburban housing over apartment flats.

In contrast to the single-family sector, permits for multifamily homes including apartments and condominiums fell 16.8% year-over-year through December. That’s largely due to near-record levels of new apartments recently being completed and under construction, especially in the South. Until these new units are absorbed by tenants, levels of multifamily permits are expected to remain subdued.

Given the combination of the strongest economy among rich countries and such low supply of housing, the chances for a housing crash currently remain low. However, should a deep recession occur along with foreclosures rising, home prices could certainly experience a tumble.

For the time being, although the semifrozen housing market is unhealthy due to lack of supply and low affordability levels, it will likely take more homes for sale and lower mortgage rates to improve it.