Is the Housing Market Going to Crash?

  • The Federal Reserve’s 75-basis-point rate hike has put eyes back on real estate with hopes it will be enough to cool a surging housing market.
  • Housing prices continue to trend at record-high levels, even as borrowing rates continue to inch upwards.
  • Whispers of a housing market crash are floating around Wall Street, despite reassurance from several figures in the real estate world.
Real estate agent handing over a house key, desktop with tools, wood swatches and computer on background, top view. Real estate stocks.
Source: Stock-Asso / Shutterstock

Even as the S&P 500 entered bear market territory and inflation hit decade-long highs, the housing market has remained red-hot. Indeed, despite the state of the markets, home prices have seemed immune. Now, some argue real estate has been a bit too hot, drawing parallels to 2008. The question on everyone’s mind remains: Is the housing market going to crash?

Well, experts largely seem to think the answer is “no.” That doesn’t mean there aren’t problems — or that there isn’t a slowdown ahead.

Most agree the current pace of home price growth is unsustainable. Even after the Federal Reserve’s first two 50-basis-point interest rate hikes, housing prices have only continued to soar. As per the U.S. National Home Price Index, the average home cost has increased more than 4% from January to March of this year. Since last year, housing prices have jumped roughly 20%, trending around their highest levels ever.

Interestingly, housing prices have risen even as mortgage rates have rapidly climbed. Thirty-year fixed mortgage rates are currently hovering around 6.3%, the highest point since 2008. This has had a cyclical effect on mortgage demand, with the volume of mortgage applications down about 50% year over year. However, despite the falling demand and rising interest rates, home prices still haven’t eased.

Interest Rate Hike Spark Hopes of a Cooling Housing Market

Some believe the Fed’s 75-basis-point hike may be just the contractionary force needed to slow down the growth of home prices. However, most don’t expect real estate prices to actually drop. Rather, higher rates could slow or cease their accelerated rise. The simple fact is that the U.S. doesn’t have enough homes to satisfy even today’s diminished demand. This makes it difficult, despite increasing mortgage rates, to truly curb home prices.

One economic outcome that could bring about a drop in home prices is a recession. Recent days have seen more experts, like Morgan Stanley (NYSE:MS) CEO James Gorman, raise their expectations of a recession in the U.S.

Is the Housing Market Going to Crash?

A housing market crash is a different story. While many will draw comparisons to 2007 and 2008, the modern housing market is a different beast. Most analysts agree a crash is unlikely, especially given the stricter lending standards mortgage brokers are now held to. In 2022, mortgage debt is expensive, mortgage holders aren’t at immediate risk of default, and homes aren’t grossly overvalued.

Many economists predict a modest easing for the housing market as borrowing rates remain elevated. Falling demand has resulted in declining home sales for most of this year. The number of sales will likely continue to recede as interest rates rise and demand becomes better matched with the supply of homes in the country.

Doug Duncan, chief economist of Fannie Mae, foresees a soft landing for the housing market.

“Mortgage rates have ratcheted up dramatically over the past few months, and historically such large movements have ended with a housing slowdown. Consequently, we expect home sales, house prices, and mortgage volumes to cool over the next two years.”

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.


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