Real Estate 2022: The Ultimate Guide to the Coming Housing Market Crash

  • The housing market has been one of the focal points of the economy this year.
  • Some economists believe home prices may be on track for a substantial reversal after record-breaking growth the past few years.
  • As the central bank pursues even more hawkish monetary policy, a growing number of Americans have become concerned with the state of the housing market and ways to hedge against a potential drop in home prices.
housing market - Real Estate 2022: The Ultimate Guide to the Coming Housing Market Crash

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The housing market has long existed at the center of the entire country’s macroeconomic health. Millions of hopeful homebuyers have scratched their heads as home prices have climbed more than 40% since the start of the pandemic. However, heading into 2023, housing is primed for a massive change. Mortgage rates are up, while home sales, home construction and mortgage demand are down. A record number of Americans are looking to sell their homes before a cooling housing market becomes a cold one.

Looking to the Federal Reserve and recent comments from Fed Chair Jerome Powell, it’s clear the economy hasn’t yet reached the end of the central bank’s hawkish monetary policy. Further interest rate hikes and quantitative tightening are likely just right around the corner, a troubling omen for housing, which has long been considered the single most rate-sensitive industry in the country. While the case for a housing slowdown remains strong, the case for a wider, more malicious downturn continues to grow stronger by the day.

Will there be a housing market crash? Will mortgage rates continue going up? Is there any investment potential in a slowing real estate market? What will happen to home prices during a recession?

Depending on who you ask you may receive wildly diverse answers. Some maintain a housing crash is a notion out of fiction, a virtual impossibility. Others claim it’s only a matter of time.

Here at InvestorPlace, we’ve left no stone unturned in trying to find the answers so many Americans are desperate for. Whether you’re interested in making gains from a potential housing recession, or simply trying to avoid losing money when prices fall, we have you covered.

The Housing Market Crash Has Humble Origins

Like past bubble bursts, the rumors typically begin in the heat of unbridled growth. This time around, it was no different.

It’s hard to overstate just how quickly home prices ramped up from the start of the pandemic. Median U.S. home prices skyrocketed from $322,000 to $440,000, a nearly 40% jump. While it’s typical for real estate to increase in value over time, a leap of this magnitude is abnormal.

As Covid-19 sent millions of Americans inside and interest rates fell to a historical low, the demand for homes — where most were spending the vast majority of their time — naturally increased. At the same time, home construction and the general supply of housing in the U.S. plummeted. Basic economics tells us this was essentially a recipe for uncontrolled home price growth.

Most troubling for economists was that even as mortgage rates rocketed back up this year, pushing housing demand down, home prices continued growing through most of the summer. This is, in some sense, what truly sparked fears of a housing recession as well as comparisons the the 2008 crash.

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Keep Reading Below for Page 3 of Our Housing Crash Guide

Could a Recession Trigger a Housing Downturn?

While some economists still maintain that home prices are unlikely to fall due to the pinched housing supply, that argument doesn’t come without stipulations. Should the country plunge into a wider recession, even many doe-eyed economists agree the demand for homes may just fall hard enough to prompt a response from home prices.

Unfortunately, the case for a wider recession remains as uncertain as ever. According to the historic technical indicator, a recession is defined as at least two consecutive quarters of negative GDP growth. Well, we’re well past that point, and the notion that we’re already in the midst of a recession remains hotly debated. Consumer spending hasn’t taken the nosedive typical in a sinking economy, the U.S. continues to add new jobs and gas prices have come down substantially from their peak.

However, this doesn’t excuse the fact that the country’s economic tightening is far from over. The Fed is still likely to continue raising interest rates and offloading bonds. Both will result in a further decrease in aggregate demand.

The shape of a modern U.S. recession remains unclear. Its effects on housing, however, could be quite substantial.

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Keep Reading Below for Page 4 of Our Housing Crash Guide

Mortgage Rates, Interest Rates and the Housing Market: What to Expect

Mortgage rates are integral to the pricing integrity of homes in the U.S. The proof truly is in the pudding: As mortgage rates more than doubled from their pandemic levels, interest in homebuying nearly dropped dead. Mortgage applications are still at one of their lowest levels ever. One in five home sellers even lowered their asking price in August due to the surprisingly cold market. Unfortunately, it doesn’t look like much help is on the way.

As the cost to borrow goes up in the form of federal fund rate hikes, mortgage rates will likely continue to rise. Mortgage rates aren’t directly controlled by the Fed; rather they respond to certain forces, including 10-year Treasury yields. This means it is possible that even if interest rates increase, mortgage rates could stay steady. However, many economists expect a rise in lending rates to continue to put upward pressure on mortgages. And if the past year has been any indicator, the increase could be substantial.

The 30-year fixed-rate mortgage has been the bedrock of the U.S. housing market practically since time immemorial. Going forward, the path mortgage rates take will likely yield far-reaching effects on home prices.

Should a housing crash truly take root, lending rates will play a major role in the tumbling housing demand.

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Keep Reading Below for Page 5 of Our Housing Crash Guide

Do Experts Think a Crash Is Coming?

Top economists and analysts have long been conflicted over the potential for a wide-spread housing market crash. The optimists argue there simply aren’t enough available homes for sale for prices to truly dive. The doomsday theorists believe home prices are so grossly overvalued, a plunge in demand alone may be enough to trigger a cascade of plunging local markets.

The real answer? Likely somewhere in the middle.

The supply of homes for sale has increased this year. Indeed, in July, the U.S. recorded a 10.9-month supply of new houses, almost double the level recorded in December, and increasingly close to the all-time high 12.2-month supply from the 2008 housing crisis. This reflects a rampant increase in home supply, that, just months ago, would’ve seemed impossible. This takes some of the wind out of the optimists’ case, but doesn’t exactly mean a real estate crash is a certainty.

Indeed, even now, many economists and realtor firms maintain housing’s worst-case scenario is far from what many would equate to a crash.

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Keep Reading Below for Page 6 of Our Housing Crash Guide

How Far Will Home Prices Fall?

Perhaps even more divisive than the notion of a housing slowdown itself is the degree to which the market will flounder. Depending on who you ask, home prices will do anything from stagnate, continue to grow at a stunted rate, or plummet.

In that sense, everyone from realtors, economists, to Wall Street analysts are kind of in the same boat. The turn the wider economy takes will likely prove the single most impactful determinant in the housing market. As much as the Fed has touted the fabled soft landing for the economy, whether it truly comes to fruition is a story time alone will tell.

Understanding the different potential outcomes of a housing market in the trough of growth can help avoid investing in a money sink that may well shed some of its value in the months and years ahead.

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Keep Reading Below for Page 7 of Our Housing Crash Guide

Undervalued and Overvalued Housing Markets

While estimates of a 5% price drop may seem relatively mild — and make no mistake, compared to the 2008 crash, it is — that doesn’t mean that the pullback will be equal across the country.

Since the start of the pandemic, some regional markets saw their prices grow even faster than others. That’s pretty hard to do when average home prices went up 40%.

With that, the opposite is also true. There are plenty of undervalued regions where home prices are likely below what they should be, given the current elevated state of real estate prices. These locations are also likely subject to a less volatile swing should a housing crash truly take root.

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Keep Reading Below for Page 8 of Our Housing Crash Guide

How to Profit From a Potential Housing Downturn

While a housing market crash usually entails a loss of asset value, there are still ways to make a profit from a recoil in home prices.

Indeed, much like Michael Burry of The Big Short, there are opportunities abound for those who expect housing to take a turn for the worst.

Now, betting against housing is always a risky business, simply because home prices, if given enough time, will basically always go up. However, it’s possible to make 3x returns on each percent home prices fall.

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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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