Housing Market Collapse? Some Say Bring it On

A house breaking apart

The warnings have been ominous: The high-flying pandemic-era housing market might turn out to be a bubble. Home prices could crash. It could be almost as bad as the Great Recession all over again, with homes losing up to 20% of their value on average. (In the last housing crash, prices fell 26% between their peak in 2007 and their low point in 2012).

That all sounds pretty good to Rebecca Rush, an advertising copywriter who rents the ground floor of a house in Boulder, Colorado, where the median-priced home sells for almost $1 million, according to Redfin. In fact, it might be the only way she’ll be able to move into a home of her own.

“There’s no way in this expensive market that I can afford anything at the rates that they currently are and the prices that things still seem to be,” she said.

Key Takeaways

  • Some forecasters predict a housing price crash of up to 20%, which would be welcome news for buyers who have been priced out of the market.
  • Falling home prices would also help decrease overall inflation and possibly slow interest rate hikes.
  • While waiting for prices to fall could be a viable strategy for sidelined buyers, some experts say timing the market is impossible.

Rush isn’t alone. For people currently unable to afford to buy a house, a crash in prices could be a financial godsend—and it might well be on the way. Nationwide home prices declined for a second straight month in August (the first time that’s happened since 2012), data from the S&P CoreLogic Case-Shiller Home Price Index showed Tuesday. One economist put the odds of a market crash—that is, prices falling 10% or more—at 35% as of Monday.

“For those potential home buyers who are priced out of their desired home in today’s market, it might pay to wait,” Odeta Kushi, deputy chief economist at First American Financial Corporation, said in an email. “Sitting on the sidelines may allow a potential buyer to continue to pay down their debt, build up their credit, and save for the down payment and closing costs.”

Rising Mortgage Rates Are Cooling the Once-Hot Market

The extreme seller’s market that prevailed during the pandemic has cooled off dramatically this year. Between February 2020 and June 2022, home prices rose 42%, according to the Case-Shiller index—but they’ve started to go down again.

Soaring mortgage rates have hurt home sales, making it tougher for buyers, and in turn, for sellers. The Federal Reserve has hiked its benchmark interest rate at a furious pace this year in an effort to slow down the economy and bring rampant inflation under control, and that’s made the average rate on a 30-year fixed mortgage soar to 7.16% a rate not seen since 2001, according to data from the Mortgage Bankers Association.

The price surge of the past two years combined with the rapidly rising mortgage rates of recent months has squeezed homebuyers’ budgets hard. The typical monthly mortgage payment for a newly bought home has jumped 55%, or $658 this year, economists at Zillow said in an analysis earlier this month.

That means a household making the median income would have to spend about 30% of their budget on the mortgage payment, not counting things like insurance and taxes. That’s at the threshold Zillow considers “housing burdened,” and well over the 22.8% share that mortgage payments took out of the typical household budget between 2005 and 2021.

There are only a few ways for things to get better for would-be homebuyers from here. For the average mortgage payment to fall back to the 22.8% share of budget that it had before 2021 would require “a meaningful shock to affordability (either in terms of prices or rates falling or incomes rising),” Zillow senior economist Nicole Bachaud wrote in the analysis.

A Crash or a Rebalancing?

Many experts think falling prices are about to make things much easier for buyers.

“Weighing up the evidence, a marked fall in house prices now seems inevitable,” said Sam Hall, a property economist at Capital Economics, in an email.

Whether home prices fall significantly partly depends on whether unemployment rises and forces people to sell their homes, said Scott Duba, managing director of wealth management at Prime Capital Investment Advisors, in an email.

“Overall, it seems like it is going to become more of a buyer’s market over the next year or so, at least relative to the very tight, seller-friendly market we’ve seen for the past two years,” he said.

In addition to benefiting people who have been priced out of buying a house, a decline in home prices would have one major benefit to the economy: a reduction in inflation and presumably a subsequent easing of interest rate hikes. Since home prices are a major component of inflation measures such as the Consumer Price Index, reducing them would go a long way toward bringing inflation down, ING’s Knightley wrote. That could encourage the Fed to back off from raising interest rates more.

However, a major downturn isn’t guaranteed—and even if it happens, don’t expect a return to pre-pandemic prices. Economists at Zillow don’t think a crash will happen because there are so few homes on the market that prices are likely to stay high despite so many buyers dropping out.

“Buyers who are trying to wait out the market—for things to become more affordable again—will likely be waiting for a long time,” Bachaud wrote. “While prices are falling modestly now as the market rebalances, long-term prices are still going to appreciate, and with high mortgage rates looking to stick around, future affordability is threatened.”

Trying To Time the Market Is Risky

The contradictory forecasts highlight the uncertainty of trying to predict what the market will do next. Some experts say buyers shouldn’t even try to predict future conditions.

“We always advise buyers to avoid trying to ‘time the market,’ and instead make decisions based on their unique financial situation and long-term goals,” said Glenn Brunker, president of Ally Home, in an email. “The housing market can be unpredictable and shift at any moment. If you decide to hold off in hopes of rates going down, the opposite could happen. The same goes for home prices. You can always refinance down the road, if rates go down, to lower your monthly payments.”

With risks to both buying now and waiting it out, sidelined buyers like Rush are left in something of a bind.

“I’ve been kicked out twice because whoever owned the property I was in wanted to sell it or wanted to move back,” Rush said. “I want to own and I am kicking myself for the first seven years I was here, I didn’t do it. I just was freaked out by the prices and I should have just bitten the bullet and done it. But here’s where we are.”


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