Is the housing market about to crash?

Noted pundit offers glimpses into the future – including what 2023 may look like

Is the housing market about to crash?

Given the economic downshift seen this year, there is a question on virtually everyone’s mind: Is the housing market about to crash or in danger of collapsing soon? While nobody has a crystal ball to glimpse into the future, one pundit shared his predictions with Mortgage Professional America.

“The US housing market is now slowing down after a record-breaking run that saw home values rocket to new highs and mortgage rates plummet to record lows,” Kris Lippi, owner and CEO of the popular real estate website, told MPA. “And with inflation rates climbing up and down this year, it’s not surprising that stakeholders are wondering whether the housing market is about to crash or collapse soon.”

The good news: Lippi, who’s also a licensed real estate broker and an official Forbes Real Estate Council member, doesn’t see an outright crash in the making: “The housing market may be headed for difficulties, but a full market crash is unlikely,” Lippi said.

“We’ve seen an unsustainable increase in home prices in recent years, outpacing salary growth that made it difficult for people to buy a new home. Additionally, the population is growing, but the number of homes being built is not, which may eventually result in a shortage of inventory and drive-up costs. Finally, it is anticipated that interest rates will keep increasing to combat inflation and other economic issues. This might raise borrowing costs and make it even more difficult for people who are just entering the market.”

Read more: US housing market crash coming?

Lippi offered a reminder that it takes more than these challenges to cause a market crash. He explained: As housing is a real asset, the amount of massive money (M2), a gauge of the monetary supply that comprises cash, deposits, and retail money-market mutual fund shares, must fall for the housing market to crash.

“Another factor contributing to the housing markets’ resilience is supply. The overall supply of housing in the United States and home price growth are closely correlated,” Lippi said. “The existing housing supply would take about three to four months to sell, predicting a six-month increase in home prices of about 7%. Furthermore, real estate has evolved into an institutional industry. As housing prices decline, real estate investors will be quick to purchase properties, helping keep the market afloat.”

What happens during a real estate housing market crash

“If the housing market crashes, it can affect homeowners who are still paying for their homes,” Lippi explained. “When property values quickly decline, buyers might end up with underwater mortgages, wherein their loan’s principal is higher than the property’s worth. This could force them to choose between staying in the home until the market stabilizes or selling it at a loss. If they cannot make payments, they may face foreclosure.”

Furthermore, Lippi added, home values drop during a housing market downturn. “You may come across vendors who are ready to lower their asking rates. Sellers might be more willing to negotiate a price reduction or make concessions,” he said. “As a result of the crash, there can also be short sales and foreclosures, giving prospective buyers a chance to find a bargain. However, some buyers might also think getting a mortgage is too risky.”

Is it wise to buy a home during a market crash? Why or why not?

“In general, during a housing market crash, more homes become available on the market,” Lippi said. “Additionally, housing prices decline as the number of foreclosures or owners who must sell to survive rises. As a result, buyers can get better deals if they decide to purchase during a recession. Furthermore, the Federal Reserve typically lowers interest rates during a recession. As a result, buyers can take advantage of lower mortgage rates.

Read next: US housing crash – what would make it happen?

“However, a recession also means job uncertainty for many, so it’s best to buy only if your income source is recession-proof. If you’re planning to sell your home to buy a new one, you might find it difficult to sell. Banks may also be less willing to approve mortgages during a recession.”

What happens to interest rates in the event of a housing market crash

“People do not spend a lot during a recession,” Lippi noted. “As a result, the flow of money is constrained. This affects the economy further. To encourage spending, the Federal Reserve will adjust interest rates. Lenders use this adjusted interest rate to determine loan and mortgage rates. If your mortgage rate is lower, you will pay less for your house over time.”

Read more: Current Mortgage Rates in the USA

What causes a housing market crash?

“Typically, a housing market crash happens when a housing market bubble bursts,” Lippi explained. “A housing bubble occurs when the demand grows as more buyers continue to enter the market. This causes a shortage in supply, driving prices up. However, this phenomenon doesn’t last. The rising prices discourage buyers, reducing the gap between supply and demand. An economic downturn like what we’re experiencing right now can also cause the bubble to burst.”

In general, he said a housing market crash can be caused by a mix of the following:

  • Interest rate spikes make homeownership out of reach for buyers and create financial struggles for current homeowners. This often leads to defaults and foreclosures, which result in more homes available in the market.
  • When there’s a decline in economic activity, there are fewer job openings, and job losses are common. There is less disposable income, and people try not to spend much. Ultimately, they will not buy new homes.
  • As the demand decreases, demand and supply will come into equilibrium. Home price increases will slow down. But as the economic downturn continues, credit standards will tighten, prospects will leave the market, supply will rise, and prices will keep on dropping.

What to expect in the housing market in 2023

“2023 will be an exciting year for the US housing market,” Lippi said. “Many things are affecting the market right now, inflation included. As it is, the market is unpredictable, although a crash is unlikely to happen.

“However, property prices are expected to increase by about 2% in 2023. And given that the inflation rate has begun to improve in the past couple of months (from 9.1% in June to 7.7% in October), the Federal Reserve might not be lowering interest rates. This can result in a further decline in home sales.

“Although the market cooldown may continue until 2023, there are several ways and indicators that it will survive, albeit turning into a buyer’s market. As interest rates continue to increase until inflation stabilizes, fewer buyers will be in the market. There will be fewer bidding but more negotiations in favor of those who actually decide to buy.”