U.S. Housing Market Slows but Avoids Crash Despite Price Declines

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In a shift from the record-breaking momentum that saw U.S. mortgage rates at historic lows and housing prices reaching unprecedented highs, the housing market appears to be decelerating. After an 11-year uninterrupted upward trajectory, housing prices as of April 2023, have observed three consecutive months of year-on-year decline.

The National Association of Realtors (NAR) reported that median prices in spring 2022 exceeded the $400,000 mark for the first time, a testament to the prolonged buoyancy of the real estate market. Even after recent contractions, prices remain $100,000 higher than the onset of the COVID-19 pandemic in March 2020. The fervor of bidding wars has largely dissipated, inventory levels have relaxed, and the frothy market sentiment has dwindled.

In late May, Elon Musk, the billionaire founder of Tesla and owner of Twitter, suggested in a tweet that commercial real estate is swiftly deteriorating and residential real estate may follow. However, housing economists and analysts project a modest correction, not foreseeing a drop comparable to the Great Recession.

The last time the U.S. housing market experienced such volatility was between 2005 and 2007. Then, home values plummeted disastrously, triggering the most severe global economic downturn since the Great Depression. As the housing boom is now challenged by escalating mortgage rates and potential recession, questions arise about the likelihood of a housing market crash.

Housing economists, while acknowledging the potential for further price reductions, believe that any downturn will be significantly less severe than the one observed during the Great Recession. Homeowners today are better positioned with stronger personal balance sheets, excellent credit, substantial home equity, and fixed-rate mortgages under 5 percent. Additionally, the caution exhibited by builders in their construction pace, remembering the lessons from the Great Recession, has resulted in a persistent shortage of homes for sale.

The market’s cooling is different from previous downturns. Inventories have fallen dramatically while homeowners, enjoying the benefits of locked-in 3 percent mortgage rates, are reticent to sell with current rates nearing 7 percent. This situation maintains a constrained supply, making this market correction unlike the drastic collapse of property prices seen during the Great Recession.

In spite of the downturn, prices are slowly climbing again. S&P CoreLogic’s Case-Shiller U.S. National Home Price NSA Index reported the second straight month of modest price increases after a seven-month period of declines.

Five key reasons suggest a housing market crash isn’t on the horizon: inventories remain critically low; builders can’t accelerate construction to meet demand; demographic trends are stimulating buyer demand; lending standards are strict; and foreclosure activity remains low.

The consensus is clear: while home prices continue to challenge affordability, the current boom is unlikely to conclude with a disastrous crash.