Is the Housing Market About to Crash—Again?

The housing market is a major indicator of economic health, but what can we expect to see as we move into the peak housing season

Single-family homes are shown in a residential neighborhood in Miami, Fla., on May 10, 2022. Joe Raedle/Getty Images

Commentary

The adage “To be right too soon is to be wrong” may apply to the residential housing market right now.

On the one hand, there are big factors and forces at work that could drive prices skyward or at least cause only minor drops in values. But on the other, there are factors that may send housing prices crashing to earth.

It’s hard to tell which way the market is going. If you listen to three different analysts on the housing market, you likely will get three different opinions.

Conflicting Data Cloud the View

Let’s start by looking at the current market. Prices remain high in the more desirable areas of the country; no surprise there. In Southern California, for instance, prices remain high and inventory is low in the under-$2 million price range.

In March, Redfin said home prices in Los Angeles County fell by more than 6 percent year over year, and that we’ve seen the biggest decline in home prices in 10 years. At the same time, median prices climbed 3.1 percent, to $820,000 from $795,000, between February and March.

Then, in April, we saw the steepest decline in home prices overall in over a decade, while the spring-buying volume is lower than normal.

Meanwhile, there are many areas in states that saw prices jump during the pandemic that are now seeing price declines.

In South Florida, for example, the slowdown continues, with buyers who are less willing to pay full price. Prices are also falling in states such as Texas, Idaho, and Utah, among others, but they’re decreasing incrementally, not crashing to pre-pandemic levels.

There are several reasons why home prices remain as high as they are.

Low Inventory, High Demand

The fact that fewer homes are being built to meet demand means that low inventory is keeping prices high. Nationally, there is less than a three-month supply of homes on the market. During the pandemic, it was just 1.7 months’ supply, so it’s still mostly a seller’s market.

Contributing to low inventory is the lack of new homes. Homebuilders burned by the housing crash in 2008-09 have held back the past several years, leaving inventory low.

Stay-at-Home Work Trends Affect Demand

The number of people working from home (WFH) during the pandemic skyrocketed, driving buyers into larger homes and relocation choices. The WFH trend is likely to remain in place, although to a lesser degree than we’ve seen.

Another factor driving demand for housing is that more millennials than ever are living with their parents. As prices remain high, millennials will continue to find it difficult to afford a home.

Foreclosure Rates Staying Low

Typically, when the economy is faltering, more homeowners default on their mortgage loans. This hasn’t happened, at least not yet.

One of the reasons why is that even with inflation in the economy, homeowners have realized substantial gains in their home equity from the dramatic price rises in the past three years. That’s allowed them to tap into their equity as needed and reduced the inventory of houses that would normally occur as economic conditions deteriorate.

Another reason is that many homeowners benefit from record-low mortgage rates that were available until 2022. In short, mortgage payments for many homeowners remain affordable, especially with multiple breadwinners in the household and savings from WFH roles.

The Low-Interest Rate Trap

On the flip side, today’s high interest rates mean that many homeowners who would like to move simply can’t afford to. With mortgage rates in the range of 6 to 7 percent, up from the range of 2 to 4 percent just a few years ago, even downsizing can cost more than it does staying put.

Today, 62 percent of homeowners have a mortgage rate below 4 percent, and about 23 percent hold mortgages that are less than 3 percent. With homeowners essentially priced out of the market by high-interest rates, the normal turnover inventory of houses remains low.

That said, there are some key factors that may drive home prices down faster and deeper than many expect.

The Affordability Crisis

One is the so-called affordability crisis. Today, about 73 percent of U.S. households can’t afford a median-priced new home of $425,786.

That percentage gets higher as interest rates rise. Even a quarter-point rise to 6.5 percent to 6.25 percent translates to 1.28 million buyers being unable to afford the median-priced home. The results are similar as rates go to 6.75 percent from 6.5 percent.

At some point, with the majority of buyers priced out of the market, home prices will have to fall.

But how far and how soon?

Will Housing Follow Commercial Market?

There’s another factor that may change the residential market very quickly, and that’s the commercial real estate market. Some think that the commercial real estate market is on the verge of a crash that could rival the collapse of 2008–09.

With about $450 billion in low-interest commercial real estate loans expiring this year, the commercial real estate market is due for a serious market adjustment. Low occupancy rates and higher interest rates will seriously impact property values by as much as 40 percent.

More to the point, a commercial real estate collapse could spread to the residential market. That’s the view of Elon Musk and other savvy observers. Some expect to see a 15 to 20 percent fall in home prices in the wake of a commercial property meltdown.

The key difference of this last factor is that it has yet to occur. All the others mentioned are already in the equation. The potential effects of a possible commercial real estate crash remain to be seen.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.