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Much to the chagrin of would-be homebuyers, property prices just keep rising. It seems nothing — not even some of the highest mortgage rates in nearly 23 years — can stop the continued climb of home prices.
Prices increased once again in January, according to the National Association of Realtors (NAR), which reports that median existing-home prices were up 5.1 percent over last year — the seventh month in a row of year-over-year jumps. In another reflection of ongoing increases, the S&P CoreLogic Case-Shiller home price index had increased for nine consecutive months before finally inching down in November, and the drop was only a minuscule 0.2 percent.
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 a strange thing happened on the way to the housing market crash: Home values started rising again.
Prices will remain firm and will not decline on a national level.— Lawrence Yun, Chief Economist, National Association of Realtors
NAR data shows that median sale prices of existing homes are near record highs. January 2023’s median of $379,100 is off the all-time-high of $413,800, but it’s the highest January median on record. (Seasonal fluctuations in home prices make late spring the highest-priced time of the year — the all-time-high was reached in June 2022.)
Now, home prices are rising more quickly than wages, a reality that intensifies affordability challenges, says Lawrence Yun, NAR’s chief economist. “Any time home prices outpace people’s incomes, that is not good,” Yun told reporters Feb. 22.
Home values held steady even as mortgage rates soared to 8 percent in October 2023, reaching their highest levels in more than 23 years. (They have since dipped, falling below 7 percent before averaging 7.13 percent in Bankrate’s weekly survey released Feb. 21.) The main culprit is a lack of housing supply. Inventories remain frustratingly tight, with NAR’s January data showing only a 3.0-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 recent 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 January 2024 Housing Market Trends Report, high mortgage rates have increased the monthly cost of financing the typical home (after a 20 percent down payment) by 5.4 percent since last year. That equates to $108 more in monthly payments than a buyer last January would have seen.
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 far 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 meaningfully, it could send new buyers flooding into the market, pushing up home prices.
“You’ve got an entire generation of pent-up demand,” Liniger says. “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.”
NAR’s Yun notes that some once-hot markets have seen small declines in prices. In Austin, Texas, for instance, prices are off about 5 percent from their peak. But he sees little chance of falling prices on a broader scale. “Prices will remain firm and will not decline on a national level,” he says.
- According to Bankrate’s weekly national survey of large lenders, the average mortgage interest rate on a 30-year loan was 7.13 percent as of February 21.
- Existing-home sales rose 3.1 percent from December 2023 to January 2024, the National Association of Realtors says. However, volumes experienced a 1.7 percent decline since January of last year.
- The nationwide median sale price in January was $379,100, per NAR.
- January saw a 3-month supply of housing inventory, still below the 5 to 6 months needed for a healthy, balanced market — one that favors neither buyers nor sellers.
- Realtor.com’s January Housing Market Trends Report showed that the number of homes for sale in the country’s 50 largest metro areas was up 7.9 percent year-over-year.
- A total of 33,270 U.S. homes had foreclosure filings — default notices, scheduled auctions or bank repossessions — in January, according to the latest numbers from ATTOM Data Solutions. That’s up 5 percent from a year ago. Delaware had the highest foreclosure rate of any state in January, at one foreclosure filing for every 2,269 housing units, followed closely by Nevada with one for every 2,272 units.
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 percent — 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 a December Realtor.com report, two-thirds of all current mortgages have rates below the 4 percent 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 says. “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
Economists have long predicted that the housing market would eventually cool as home values become a victim of their own success. After posting 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 has been on the rise again, with a 5.1 percent annual gain in January, according to NAR. That represents the seventh 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 percent 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 percent 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 says. “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 5- or 6-month supply of housing inventory. The National Association of Realtors says there was a 3.0-month supply of homes for sale in January (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,” says Greg McBride, Bankrate’s chief financial analyst. “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 the fourth 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 2004-2006, then that is a whole different animal,” says McBride. “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.” Quite the opposite: A recent Federal Reserve survey of senior loan officers reveals that lending standards have actually tightened even further in anticipation of heightened demand when rates eventually drop.
- 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.
Actually, most industry experts do not expect it to. Housing economists point to five main reasons that the market will not crash anytime soon: low inventory, lack of new-construction housing, large amounts of new buyers, strict lending standards and fewer foreclosures.
Probably not — or at least, not by much. Home prices did decrease year-over-year for a few months in early 2023, for the first time in more than a decade — but the decrease was relatively modest and prices have since risen sharply, reaching record highs. Greg McBride, Bankrate’s chief financial analyst, says a plateauing of prices is more likely than a steep fall, and other experts’ housing market predictions for 2024 align with that sentiment.
It depends on many factors, including how much money you earn versus how much you pay out in debts and expenses each month — known as a debt-to-income ratio. Many financial advisors recommend the 28/36 percent rule of home affordability, which states that you should spend no more than 28 percent of your gross monthly income on housing expenses, and no more than 36 percent on total debt. Bankrate’s home affordability calculator can help you crunch the numbers.
Different minimum credit scores are required by lenders for different types of mortgages. However, a score of at least 620 is typically required for a conventional loan — and if it’s as high as 740, all the better. Generally, the higher your credit score the lower the interest rate you will qualify for. Successful borrowers today tend to have outstanding credit, with a high median score of 770.