To the frustration of prospective home purchasers, property prices persist in their upward trajectory. It appears that not even the highest mortgage rates witnessed in the past two decades can impede the relentless ascent of home prices.
According to the National Association of Realtors (NAR), prices experienced another surge in March, marking the ninth consecutive month of year-over-year increases in median existing-home prices, up by 4.8 percent compared to the previous year. Reflecting this ongoing trend, the S&P CoreLogic Case-Shiller home price index for February recorded a 6.4 percent increase from the preceding year.
Gone is the notion that the post-pandemic “housing recession” would reverse the substantial gains seen in home prices. Despite signs of a slowdown in late 2022, the U.S. housing market has defied expectations, with home values resuming their upward trajectory.
NAR data reveals that median sale prices of existing homes are hovering near record levels. March 2024 witnessed a median price of $393,500, slightly below the all-time high of $413,800, but still marking the highest March median on record (typically, late spring sees the highest prices, with the peak occurring in June 2022).
Moreover, home prices have outpaced wage growth, exacerbating affordability challenges, notes Lawrence Yun, NAR’s chief economist. “Whenever home prices exceed people’s incomes, it presents challenges,” Yun remarked. This dynamic particularly impacts first-time buyers, while repeat buyers can leverage gains from the housing market and investments to facilitate their purchases.
Supply and demand
Despite mortgage rates skyrocketing to 8 percent in October 2023, marking their highest point in over 23 years, home values remained stable. Since then, rates have slightly decreased, briefly dipping below 7 percent before averaging at 7.12 percent in Bankrate’s weekly survey released on May 15. The primary factor behind this phenomenon is the persisting shortage of housing supply amidst robust demand. Inventories continue to remain notably low, with NAR’s March data indicating only a 3.2-month supply.
Rick Arvielo, the head of mortgage firm New American Funding, asserts, “You’re not going to see house prices decline,” attributing this to the insufficient inventory available.
Skylar Olsen, chief economist at Zillow, echoes this sentiment regarding the supply-and-demand imbalance. She anticipates that home prices will continue to rise in 2024, which is favorable for sellers but poses challenges for first-time buyers striving to enter the housing market. “We’re not in that space where things are suddenly going to be more affordable,” Olsen remarks.
Furthermore, according to Realtor.com’s April 2024 Housing Market Trends Report, the high mortgage rates have led to a 6.9 percent increase in the monthly financing cost of a typical home (following a 20 percent down payment) compared to last year. This translates to approximately $148 more in monthly payments than what a buyer would have encountered in April of the previous year—a notable escalation.
Considering these factors, housing economists and analysts anticipate that any market correction will likely be minimal. There are no expectations of price declines comparable to those witnessed during the Great Recession.
Is the housing market going to crash?
No, a significant price decline isn’t likely due to the persistent shortage of sellers relative to buyers. “There’s just generally not enough supply,” explains Mark Fleming, chief economist at title insurer First American Financial Corporation. “There are more people than housing inventory. It’s Econ 101.”
Dave Liniger, founder of real estate brokerage RE/MAX, notes that the sharp increase in mortgage rates has skewed the market. While many potential buyers have been waiting for rates to decrease, a meaningful decline could trigger a surge of new buyers, driving up home prices.
Liniger points out, “You’ve got an entire generation of pent-up demand. We’re in this fascinating position of tremendous demand and too little inventory. When interest rates do start to come down, it’ll be another boom-and-bust cycle.”
Lawrence Yun of NAR observes that certain once-hot markets, like Austin, Texas, have seen slight price decreases. However, he sees little likelihood of widespread price drops. “Prices will remain firm and will not decline on a national level,” he asserts.
Comparisons are drawn to the housing market of 2005 to 2007, which appeared excessively inflated before crashing, leading to severe economic repercussions. However, housing economists concur that a crash is improbable. While prices may decrease, the decline won’t be as drastic as during the Great Recession.
One notable distinction between then and now is the stronger financial position of homeowners. Today’s typical homeowner with a mortgage boasts excellent credit, substantial home equity, and a fixed-rate mortgage locked in at a low rate. Additionally, builders, mindful of the lessons from the Great Recession, have been cautious in their construction pace, resulting in a persistent shortage of homes for sale.
Lawrence Yun underscores, “We simply don’t have enough inventory. Will some markets see a price decline? Yes. [But] with the supply not being there, the repeat of a 30 percent price decline is highly, highly unlikely.”
Existing home prices
For quite some time, economists have anticipated a cooling of the housing market as home values inevitably face repercussions from their own success. After experiencing a year-over-year decline in February 2023 for the first time in over a decade, the median sale price of a single-family home has resumed its ascent, registering a 4.8 percent annual increase in March, as reported by NAR. This marks the ninth consecutive month of year-over-year gains.
In general, home prices have outpaced income growth by a significant margin. This affordability strain is further compounded by the fact that mortgage rates have more than doubled since August 2021.
Experts say prices to hold strong
Although the housing market is indeed experiencing a cooling trend, this slowdown differs significantly from typical real estate downturns. Despite high prices, there has been a notable plunge in the actual volume of home sales, and inventory levels remain insufficient to meet demand. Homeowners who secured mortgages at 3 percent several years ago are opting not to sell—understandably so, given that current rates are more than double that figure—resulting in an even tighter supply of homes for sale. Consequently, the forthcoming correction will bear no resemblance to the drastic collapse of property prices witnessed during the Great Recession, where certain housing markets saw values plummet by up to 50 percent.
As Yun stated in a fall statement, “We will not have a repeat of the 2008–2012 housing market crash. There are no risky subprime mortgages that could implode, nor the combination of a massive oversupply and overproduction of homes.”
Ken H. Johnson, a housing economist at Florida Atlantic University, describes the housing market as being pulled in two conflicting directions. “I think we are in for a period of relatively flat housing price performance around the country as high mortgage rates put downward pressure on prices, while significant demand from household formation and an inventory shortage place upward pressure,” he says. “These forces, for now, should balance each other out.”
5 reasons there will be no housing market crash
Housing economists cite five compelling reasons why an imminent crash is unlikely.
- Low Inventories: Typically, a balanced market maintains a 5- to 6-month supply of housing inventory. However, according to the National Association of Realtors, in March, there was only a 3.2-month supply of homes for sale. This ongoing scarcity of inventory explains why many buyers are forced to bid up prices. It also indicates that the supply-and-demand dynamics won’t allow for a price crash in the foreseeable future.
- Slow Pace of Construction: Homebuilders scaled back significantly after the last crash and never fully returned to pre-2007 levels. Consequently, they’re unable to acquire land and secure regulatory approvals swiftly enough to meet demand. While they’re constructing homes at their maximum capacity, a repeat of the overbuilding seen 15 years ago seems improbable.
- Demographic Shifts: Various demographic factors are driving demand for homes. Many Americans, realizing the need for larger living spaces during the pandemic, are upgrading their homes, especially with the rise of remote work. Additionally, millennials, a substantial demographic group in their prime buying years, along with growing Hispanic demographics, are enthusiastic about homeownership.
- Stringent Lending Standards: Unlike in 2007 when “liar loans” were prevalent, lenders now enforce rigorous standards. Borrowers need to demonstrate their income, and those obtaining mortgages typically boast excellent credit. The median credit score for new mortgage borrowers in the first quarter of 2024 was an impressive 770, according to the Federal Reserve Bank of New York. Should lending standards loosen significantly, a crash could become a concern. However, recent Federal Reserve surveys indicate that lending standards have tightened further in anticipation of increased demand when rates eventually drop.
- Muted Foreclosure Activity: Unlike the aftermath of the housing crash, where millions of foreclosures flooded the market, current foreclosure activity remains subdued. Most homeowners have significant equity in their homes, and foreclosure rates hit record lows in 2020 due to lenders refraining from filing default notices during the pandemic. While there has been a slight increase in foreclosures since then, it’s not comparable to previous levels.
In summary, while home prices continue to stretch affordability limits, the consensus is that this boom is unlikely to culminate in a bust.