Is the housing market going to crash? What the experts are saying

Much to the chagrin of would-be homebuyers, property prices just keep rising. It seems nothing – not even the highest mortgage rates in nearly 23 years – can stop the continued climb of home prices.

Prices increased once again in December, according to the NAR, which reports that median existing-home prices were up 4.4% over last year – the sixth month in a row of year-over-year jumps. In another reflection of ongoing increases, the latest S&P CoreLogic Case-Shiller home price index showed a 4.8% jump in October that represented the ninth month in a row of gains.

So much for the idea that a “housing recession” would reverse some of the outsized price gains in homes. The U.S. housing market had finally started slowing in late 2022, and home prices seemed poised for a correction. But, strangely, on the way to the housing market crash, home values started rising again.

NAR data shows that median sale prices of existing homes are near record highs. December 2023’s median of $382,600 is off the all-time-high of $413,800, but not by much, especially for a typically quiet time of year. Seasonal fluctuations in home prices make June the highest-priced month of most years – the all-time-high was reached in June 2022.

“The housing recession is essentially over,” said Lawrence Yun, NAR’s chief economist. Home values held steady even as mortgage rates soared to 8% in October 2023, reaching their highest levels in more than 23 years. They have since dipped back down, falling below 7% in recent weeks. The main culprit is a lack of housing supply. Inventories remain frustratingly tight, with NAR’s December data showing only a 3.2-month supply.

“You’re not going to see house prices decline,” says Rick Arvielo, head of mortgage firm New American Funding. “There’s just not enough inventory.”

Skylar Olsen, chief economist at Zillow, agrees about the supply-and-demand imbalance. Her latest forecast says home prices will keep rising into 2024 – welcome news for sellers but not so great for first-time buyers struggling to become homeowners. “We’re not in that space where things are suddenly going to be more affordable,” Olsen says.

In fact, the trend is quite the opposite. According to Realtor.com’s December 2023 Housing Market Trends Report, high mortgage rates have increased the monthly cost of financing the typical home (after a 20% down payment) by 6.1% since last year. That equates to $123 more in monthly payments than a buyer last December would have seen.

Mortgage rates fell sharply in late December, a move that boosted affordability. However, lower mortgage rates also are pulling more buyers into the market.

“The potential for a decline in mortgage rates intersects with the prime homebuying time of the year – if you can find one to buy, that is,” said Greg McBride, Bankrate’s chief financial analyst.

Taking all this into account, housing economists and analysts agree that any market correction is likely to be a modest one. No one expects price drops on the scale of the declines experienced during the Great Recession.

Is the housing market going to crash?

No. There are still more buyers than sellers, and that means a meaningful price decline can’t happen: “There’s just generally not enough supply,” says Mark Fleming, chief economist at title insurer First American Financial Corporation. “There are more people than housing inventory. It’s Econ 101.”

Dave Liniger, the founder of real estate brokerage RE/MAX, says the sharp rise in mortgage rates has skewed the market. Many would-be buyers have been waiting for rates to drop – but if mortgage rates do decline, it could send new buyers flooding into the market, pushing up home prices.

“You’ve got an entire generation of pent-up demand,” Liniger said. “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.”

Back in 2005 to 2007, the U.S. housing market looked downright frothy before home values crashed, with disastrous consequences. When the real estate bubble burst, the global economy plunged into the deepest downturn since the Great Depression. Now that the recent housing boom has been threatened by skyrocketing mortgage rates and a potential recession – Bankrate’s most recent expert survey puts the odds at 45% – buyers and homeowners are asking, when will the housing market crash?

However, housing economists agree that it will not crash: While prices could fall, the decline will not be as severe as the one experienced during the Great Recession. One obvious difference between now and then is that homeowners’ personal balance sheets are much stronger today than they were 15 years ago. The typical homeowner with a mortgage has stellar credit, a ton of home equity and a fixed-rate mortgage locked in at a low rate – in fact, according to Realtor.com’s December report, two-thirds of all current mortgages have rates below the 4% mark.

What’s more, builders remember the Great Recession all too well, and they’ve been cautious about their pace of construction. The result is an ongoing shortage of homes for sale.

“We simply don’t have enough inventory,” Yun said. “Will some markets see a price decline? Yes. (But) with the supply not being there, the repeat of a 30% price decline is highly, highly unlikely.”

Existing home prices

Economists have long predicted that the housing market would eventually cool as home values become a victim of their own success. After posting the a year-over-year decrease in February 2023 for the first time in more than a decade, the median sale price of a single-family home is on the rise again, with a 4.4% annual gain in December, according to NAR. That represents the sixth month in a row of year-over-year increases.

Overall, home prices have risen far more quickly than incomes. That affordability squeeze is exacerbated by the fact that mortgage rates have more than doubled since August 2021.

Experts say prices to hold strong

While the housing market is indeed cooling, this slowdown doesn’t look like most real estate downturns. Despite prices being high, the actual volume of home sales has plunged, and inventories of homes for sale have fallen sharply, too. Homeowners who locked in 3% mortgage rates a couple years ago are declining to sell – and who can blame them, with current rates more than double that? – so the supply of homes for sale is even tighter. As a result, the correction will be nothing like the utter collapse of property prices during the Great Recession, when some housing markets experienced a 50% cratering of values.

“We will not have a repeat of the 2008-2012 housing market crash,” Yun said in a statement last fall. “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, says the housing market is being pulled in two competing 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 said. “These forces, for now, should balance each other out.”

5 reasons there will be no housing market crash

Housing economists point to five compelling reasons that no crash is imminent.

Inventories are still very low: A balanced market typically has a five- or six-month supply of housing inventory. The National Association of Realtors says there was a 3.2-month supply of homes for sale in December (back in early 2022, that figure was a tiny 1.7-month supply). This ongoing lack of inventory explains why many buyers still have little choice but to bid up prices. And it also indicates that the supply-and-demand equation simply won’t allow a price crash in the near future.

Builders didn’t build quickly enough to meet demand: Homebuilders pulled way back after the last crash, and they never fully ramped up to pre-2007 levels. Now, there’s no way for them to buy land and win regulatory approvals quickly enough to quench demand. While they are building as much as they can, a repeat of the overbuilding of 15 years ago looks unlikely. “The fundamental reason for the run-up in price is heightened demand and a lack of supply,” McBride said. “As builders bring more available homes to market, more homeowners decide to sell and prospective buyers get priced out of the market, supply and demand can come back into balance. It won’t happen overnight.”

Demographic trends are creating new buyers: There’s strong demand for homes on many fronts. Many Americans who already owned homes decided during the pandemic that they needed bigger places, especially with the rise of working from home. Millennials are a huge group and in their prime buying years, and Hispanics are a growing demographic also keen on homeownership.

Lending standards remain strict: In 2007, “liar loans,” in which borrowers didn’t need to document their income, were common. Lenders offered mortgages to just about anyone, regardless of credit history or down payment size. Today, lenders impose tough standards on borrowers – and those who are getting a mortgage overwhelmingly have excellent credit. The median credit score for new mortgage borrowers in the third quarter of 2023 was an impressive 770, the Federal Reserve Bank of New York says.

“If lending standards loosen and we go back to the wild, wild west days of 2004-06, then that is a whole different animal,” McBride said. “If we start to see prices being bid up by the artificial buying power of loose lending standards, that’s when we worry about a crash.”

Foreclosure activity is muted: In the years after the housing crash, millions of foreclosures flooded the housing market, depressing prices. That’s not the case now. Most homeowners have a comfortable equity cushion in their homes. Lenders weren’t filing default notices during the height of the pandemic, pushing foreclosures to record lows in 2020. And while there has been an uptick in foreclosures since then, it’s nothing like it was.

All of that adds up to a consensus: Yes, home prices are still pushing the bounds of affordability. But no, this boom shouldn’t end in bust.