As the housing market continues to trend around its highest level ever despite a rapidly tightening monetary environment, whispers are circulating around Wall Street that housing may be in a bubble just waiting to be burst. Investors and would-be homebuyers everywhere are wondering: What would cause a housing market crash?
Well, according to many experts, something far from our current reality. While many will make comparisons to the 2008 housing bubble, the current real estate market is a distinctly different entity. Mortgage owners aren’t at wide risk of default, home prices are based largely on the organic supply and demand of homes rather than speculation and lending rates are only going up. As such, the notion of a housing market “crash” is, for many experts, unlikely.
Instead, many predict sky-high interest rates and the subsequent fall in housing demand to slow home price growth, rather than result in any substantial reversal in prices.
Reasonably so, the current elevated state of the housing market is mostly a result of a supply-demand mismatch. Currently, the U.S. only has a roughly two-month supply of available homes, compared to the standard five-month stockpile. This is largely a consequence of the Covid-19 pandemic, which both slowed down home construction and increased the demand for homes due to the near 0% interest rates.
Why Would the Housing Market Crash?
A housing market crash is generally defined as a wide-spread drop in home prices. For example, the 2008 bubble burst resulted in median house values dropping nearly 14%.
A modern housing market crash would likely be a consequence of overzealous monetary policy. 30-year fixed mortgage rates are already at their highest level in more than a decade, trending close to 6%. This has resulted in an immediate drop in housing demand. The volume of mortgage applications is down more than 50% year-over year. With more rate hikes on the way, it’s not unreasonable to expect housing demand to continue falling. This will serve to rebalance the currently pinched housing market, but not necessarily to the point of a crash.
Recession Concerns Loom Large
Should a wider recession hit the U.S. economy, however, the conditions could be set for a mild dip in home prices. A wider economic recession would likely push more homeowners to sell their properties than would otherwise be the case. This increase in supply may result in home prices settling somewhat.
A recession could also just slow the growth of home prices, as many expect will be the case as interest rates rise. After all, average home prices climbed more than 4% from January to March of this year. This growth in home prices is clearly unsustainable. However, prices remain difficult to curb due to the limited number of homes for sale.
With that said, short of a recession, most agree the housing market isn’t under immediate risk of collapse.
Greg McBride, Bankrate’s chief financial officer (CFO) echoes this sentiment:
While the recent pace of home price appreciation isn’t sustainable over the long run, that doesn’t mean prices are at risk of a sharp drop. Real estate prices can move in big spurts — like now — and then show relatively little change over a period of years. A plateauing of prices is the more likely outcome.
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.
