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Any period of economic uncertainty can make a major financial decision — like buying a house — more stressful.
While the housing market on a national scale has seen prices decline since mid-2022 amid high interest rates, experts are noting that a sudden and abrupt housing market crash is unlikely, based on current market conditions.
Housing demand and supply, mortgage interest rates and unemployment all play roles in how the real estate market fares. Currently they indicate a period of decline in some markets and growth in others, and a decline in transactions overall — but certainly not as significant a decline as seen in the housing market crash of 2008-2009.
A recession would put stress on the housing market, and the failure of two regional banks in March — first Silicon Bank, then First Signature Bank — show that one may come sooner rather than later. To avoid rippling impacts in housing, there may be a tightening of mortgage lending practices, but homeowners with existing mortgages are still considered stable, and many of them remain uninterested in leaving their homes in the near future.
Here’s what you should know about the housing market now and the indicators that can show if we’re headed for a crash:
— Are we in a housing bubble?
— Prices can decline without a crash.
— What’s different from the 2008 housing market crash?
— What the Silicon Valley Bank failure means for mortgages and the housing market.
— Building permits are down — but demand isn’t.
— How does a recession impact the housing market?
— What conditions could lead to a housing market crash?
Are We in a Housing Bubble?
In economics, a bubble is defined as a period of rapid market value growth of an asset — in this case, homes.
Considering the fast pace of the housing market that has lasted roughly the length of the COVID-19 pandemic, rapid market value growth accurately describes the housing market up until about midway through 2022. Home price growth was in the double digits year over year every month from August 2020 thru mid-July 2022, based on home sale price data from Redfin.
Signs of a growing housing bubble slowed throughout the rest of 2022 and into the first weeks of 2023, however, as home prices continued to decline month over month during that time. Now, median home prices on the national scale are seeing minor year-over-year declines: The median home price in the U.S. between March 20 and April 16 was $366,000, a 2.7% decline compared with the same time period in 2022, according to Redfin.
With that in mind, the U.S. housing market is not currently experiencing a growing housing bubble, and the bubble of recent years appears to be getting corrected. The slow drop in price increases and moderate year-over-year decline in current median home price is in line with “a little bit of air get(ting) let out of this bubble,” which Mike Reynolds, vice president of investment strategy at Glenmede, a Philadelphia-based wealth management firm, predicted in January.
Home Prices Can Decline Without a Housing Crash
“The second half of last year was a very soft phase for homebuying demand, it kind of seemed like homebuyers reached a breaking point right in early summer thanks to affordability challenges,” Jeff Tucker, senior economist for Zillow, says.
Driving that affordability threshold, along with sky-high home prices, was the increase in mortgage interest rates. While mortgage rates are technically independent of the federal funds target rate set by the Federal Reserve, they often increase or decrease as a result of the Fed’s actions. The federal funds target rate has been raised repeatedly in the last year in a marked effort to curb inflation.
The average 30-year, fixed-rate mortgage interest rate reached more than 7% in October and November 2022, but dropped close to 6% in January. The average interest rate has shown some volatility throughout March and April, climbing toward 7% again, then dropping back down. The average rate for a 30-year, fixed-rate mortgage as of April 27 the average rate is 6.43%, according to Freddie Mac.
With many homeowners who purchased or refinanced between 2020 and mid-2022 locked into a mortgage interest rate somewhere around 3%, moving becomes downright unattractive.
“If they wanted to move they have to pay more money, so they’re not moving,” says Kimberly Jay, licensed associate real estate broker for Compass in Manhattan.
The decrease in the number of home sales since interest rates initially rose in 2022 is stark. From March 20 through April 16, there were nearly 22% fewer homes sold compared with the same time last year, according to Redfin data.
But the ability for homeowners now to wait out economic uncertainty — and climbing interest rates — may be what keeps any drop in home prices from becoming more concerning.
The easing of mortgage rates in late March and early April encouraged some buyers to come back to the market, and thus far they’ve continued to return heading into the traditional homebuyer season.
In Green Bay, Wisconsin, for example, there are fewer homes on the market but buyers appear to be back and ready to compete for homes. “It’s a hot seller’s market,” says Molly Lichtfuss, a real estate agent with Re/Max 24/7 Real Estate in Appleton, Wisconsin. She adds that homes on the market are getting 10 or more offers fast, reminiscent of the housing market in 2021.
On a national scale, the number of homes going under contract is still down compared with the same time in 2022, but it’s getting closer to even. Zillow reports that newly pending listings were down 24.14% in March compared with March 2022. In November, newly pending listings were down 38% year over year.
Tucker points out that volatility among mortgage interest rates could lead to some back and forth with homebuyers. Upticks in rates can force some buyers to hold off on making home purchases, or at least shrink their budgets.
Additional economic uncertainty — whether it’s about bank insolvency issues currently at the forefront of financial discussions or expectations for a recession in 2023 — could lead more buyers to once again back away from house hunting and sellers to stay put. Year-over-year home prices may continue to decline in that case, but likely on a fairly small scale and without the threat of a crash.
What’s Different From the 2008 Housing Market Crash?
Homeownership can feel scary during any point of economic uncertainty — especially if you have a vivid memory of the Great Recession and the housing market crash of 2008 and 2009.
“The 2008 housing crash that they think about was due to the overextension of loans to people that were not solid borrowers,” Jay says.
Predatory lending practices in the first years of the 21st century meant many homeowners faced foreclosure when adjustable interest rates rose, and unemployment further increased the number of properties in foreclosure.
Housing demand was artificially propped up by issuing mortgages to people who weren’t in good financial places to buy and maintain homes, and the economic downturn also meant buyer demand plummeted. Home values declined significantly as a result.
The current situation is very different compared with the Great Recession, says Rob Barber, CEO of market intelligence at real estate data company ATTOM, based in Irvine, California.
“As of now, unemployment is historically low and wages are rising. While home prices are down in most of the U.S. since mid-2022, they remain at near-record levels, keeping equity high,” Barber wrote in an email. “This has helped ease the increase in foreclosure activity and keep it below pre-pandemic levels, which already were far less than what the nation saw after the Great Recession.” He notes that the quarterly average of caseloads for foreclosure activity in 2009 and 2010 were six times that of 2019, which was historically a light year for foreclosure activity.
Reynolds points out another major difference between today’s market and the housing crash is the issue of supply — excessive building leading up to 2008 meant that when demand dropped, there were entire housing developments that sat vacant.
Cut to 2023, and housing is still catching up on the low rate of building compared to household formation since the Great Recession. “There are fewer homes per household than there was back then,” Reynolds says.
With today’s homeowners, laws and regulations are in place to prevent predatory lending since the Great Recession. Even as high home prices and rising interest rates have increased the total cost to buy a home, making homeownership unaffordable for otherwise would-be homebuyers, there are still more qualified buyers searching for homes than there are properties for sale.
With all these factors combined, Reynolds says he and his colleagues agree that “a crash at this point is unlikely.”
What the Silicon Valley Bank Failure Means for Mortgages and the Housing Market
The news cycle following the failure of Silicon Valley Bank and First Signature Bank in March has had many people wondering if there will be a larger financial crisis for the American people. Runs on the banks led to their insolvency — should anyone shopping for a home be worried about their savings in a bank?
In many cases, no.
“For the most part, this banking crisis has been really limited to banks that have had sort of a narrow concentration of who their banking customer is,” says Melissa Cohn, regional vice president of William Raveis Mortgage in New York.
Homebuyers currently applying for a mortgage may find that lenders are getting even more thorough in their due diligence than in recent years, “double-dotting their i’s, double-crossing their t’s to make sure that you’re secure in your job,” Cohn says.
Other banks may be less interested in lending money altogether right now. “I have seen some banks sort of raise their rates to step to the sidelines for the time being,” Cohn says.
Homebuyers financing their home purchases often include a financing contingency in the contract for home purchase, noting that if financing falls through, both parties are able to walk away from the deal whole.
If you’re buying a home now and worried about your lender failing before you’re able to get to the closing table, Jay says adding a contingency about bank insolvency that leads to loss of funding could help cover all your bases and get any earnest money back.
“There’s no downside to putting it in, unless the seller says, ‘I will not take that,’ and you’re competing with someone else,” she says.
If you have a mortgage on your current home and you’re planning to stay put, even if the bank that possesses your mortgage fails, you don’t have to worry as long as you can keep making payments.
“There’s zero risk. Once you close on a mortgage no one can come and say, ‘Sorry, you have to give it back,'” Cohn says. “They can’t take your mortgage away from you.”
She notes that some banks, when issuing a mortgage, have borrowers simultaneously open a checking account, through which mortgage payments are made.
If that’s the case with your mortgage lender, Cohn advises using that checking account only to pay your mortgage, and keeping your savings in your usual bank of choice. “People should be prudent about where they keep their deposits,” she says.
Building Permits Are Down — But Housing Demand Isn’t
As of March, the U.S. Census Bureau’s Building Permits Survey reports there were 79,400 single-family building permits filed in the U.S. (unadjusted), slightly above the forecast of 77,650 permits predicted for that month in the U.S. News Housing Market Index.
Still, it’s well above anything compared to the Great Recession: After the housing bubble burst in 2008, building permits for single-family detached homes cratered to a low of 22,100 in January 2009.
In a typical year, the number of building permits bottoms out in December and January then steadily climbs until peaking in the spring and summer months. The U.S. News Housing Market Index forecasts March as the peak for new building permits, with a decline to just over 71,000 in April. Compare that to March 2022’s peak of 107,4000, which was also the highest month for number of building permits filed in all of 2022. With far fewer permits already, expect new home construction to slow.
Builder sentiment, while low compared to 2021, has risen slightly in recent months to 45 out of 100 as of April 2023, according to the National Association of Homebuilders and Wells Fargo Housing Market Index. In comparison, builder confidence reached a whopping 84 in December 2021, and was as low as 31 in December 2022. Builder sentiment is based on the number of new single-family homes, predicted single-family homes in the next six months and overall traffic of buyers.
With low confidence, builders aren’t planning to build many new construction homes in the near future. But that doesn’t indicate the housing market is going to crash or that a new housing bubble will occur. In fact, they may be helping to avoid future problems.
“Incredibly limited supply is keeping a floor under prices — that shows sellers are really willing to hold onto what they’ve got,” Tucker says. “That does kind of prevent runaway declines in prices.”
How Does a Recession Typically Impact the Housing Market?
At least two consecutive quarters of negative GDP growth make a recession, and it’s typically accompanied by an increase in unemployment and decrease in consumption by the general public.
The financial strain individuals face during a recession leads to a slowdown in the housing market — homebuyers may pause their search if they’re worried about layoffs, and there may be a slight increase in foreclosure activity while higher unemployment increases the number of people who can’t pay their mortgages.
However, once activity on the housing market slows enough, mortgage interest rates drop to a point where buyers reenter the market, interested in getting a good deal. Unlike in the Great Recession, an increase in housing market activity helps bring the economy out of recession.
The real GDP increased in the last two quarters of 2022 — by 3.2% in the third quarter and 2.7% in the fourth, according to the Bureau of Economic Analysis. The Federal Reserve Bank of Atlanta estimates that the GDP increased increased by 2.5% in the first quarter of 2023, as of April 18.
Additionally, unemployment remains low at just 3.5% in March, according to the Bureau of Labor Statistics.
While these indicators show no recession right now, most experts agree that a recession is likely in 2023.
What Conditions Could Lead to a Housing Market Crash or Housing Bubble Burst?
While current conditions don’t point to a housing market crash, there’s no crystal ball to guarantee how the economy will fare in the next few months or years.
A few factors that could make the housing market more unstable include:
— Unemployment. A slight increase in unemployment would be OK, but a bottom fallout could be an indication of danger for the housing market. If too many people are without work, then distressed home sales climb and foreclosures become more likely. “There are predictions of an upcoming recession and possible large-scale layoffs. That surely would raise the number of households who fall behind on home loans and send foreclosure numbers upward,” Barber says.
— Homebuilding. Builders have been plagued with labor shortages for a decade, and the availability and cost of materials have been an ongoing issue since the start of the pandemic. With the slowdown in buyer activity, homebuilders are pulling back and there are fewer permits for new housing construction. That can prolong the housing shortage and draw out the demand-supply imbalance.
— Buyer demand. Housing markets have cooled slightly, but demand hasn’t disappeared, and in many places remains strong largely due to the shortage of homes on the market. If buyer demand completely disappears, it would be a sign of a problem.
— Homeowner equity. If homeowner equity sees a massive drop, either home values are dropping fast or there’s an influx of buyers who are putting little money down. High equity now serves as a cushion for the housing market in case of economic downturn. “Having equity in a home provides a lot of motivation for owners to get caught up on their loans and preserve what they’ve built up,” Barber says. “Even when they can’t, most can still sell, pay off their outstanding debt and come out with at least a small profit if they bought more than a year ago.”
— Homebuyer motivation. For the typical homebuyer, now is not the time to buy real estate with the expectation of seeing value double in a short period of time. Only purchase a home if you plan to own it for at least a few years — and will be able to make the mortgage payments for the duration.
— Foreclosures. “(I)t’s hard to pinpoint a benchmark for (foreclosure) increases that would cause alarm. But if the late 2000s are any guide, quarterly foreclosure caseloads that spike by more than 10% per quarter would be a serious warning bell of danger for the U.S. housing market,” Barber says. “That’s what happened in early 2006 before the Great Recession hit and the market started falling in 2007. This is definitely a metric worth watching very closely over the next year.”
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Update 04/27/23: This story was published at an earlier date and has been updated with new information.
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Buying a property during a recession has advantages
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