Market fluctuations

The U.S. housing market had finally started slowing in late 2022, and home prices seemed poised for a correction. But a strange thing happened on the way to the housing market crash: Home values started rising again. So much for the now-quaint notion that the post-pandemic “housing recession” would reverse some of the outsized price gains in homes.

Prices hit another new all-time high in June, according to the National Association of Realtors (NAR), which reports that median existing-home prices were up 4.1 percent over last year — the 12th month in a row of year-over-year jumps. June 2024’s median of $426,900 surpassed May’s record high of $419,300; before that, the record was $413,800, reached in June 2022. (Seasonal fluctuations in home prices typically make late spring the highest-priced time of the year.)

In another reflection of ongoing increases, the S&P CoreLogic Case-Shiller home price index for April was up 6.3 percent from a year earlier, also reaching an all-time high.

Supply and demand

The main driver of record home prices is a one-two punch straight from Econ 101 — a lack of housing supply coupled with strong demand. Inventories have been growing but remain frustratingly tight, with NAR’s June data showing a 4.1-month supply. Not even high mortgage rates have slowed price appreciation. For instance, in October 2023, home values held steady even as mortgage rates soared to 8 percent, their highest level in more than 23 years. (They have since dipped, falling briefly below 7 percent before rising above it and then dipping below it again — the average in Bankrate’s weekly survey released July 24 was 6.90 percent.)

“You’re not going to see house prices decline,” says Rick Arvielo, head of mortgage firm New American Funding. “There’s just not enough inventory.”

Skylar Olsen, chief economist at Zillow, agrees about the supply-and-demand imbalance. She predicts home prices will keep rising for the rest of this year — welcome news for sellers but not so great for first-time buyers struggling to become homeowners. “We’re not in that space where things are suddenly going to be more affordable,” Olsen says.

In fact, the trend is quite the opposite. According to Realtor.com’s May 2024 Housing Market Trends Report, high mortgage rates have increased the monthly cost of financing the typical home (after a 20 percent down payment) by 7.1 percent since last year. That equates to about $158 more in monthly payments than a buyer last May would have seen — a significant jump.

Taking all this into account, housing economists and analysts agree that any market correction is likely to be modest. No one expects price drops on the scale of the declines experienced during the Great Recession.

Is the housing market going to crash?

No. There are still far more buyers than sellers, and that means a meaningful price decline can’t happen: “There’s just generally not enough supply,” says Mark Fleming, chief economist at title insurer First American Financial Corporation. “There are more people than housing inventory. It’s Econ 101.”

Dave Liniger, the founder of real estate brokerage RE/MAX, says the sharp rise in mortgage rates has skewed the market. Many would-be buyers have been waiting for rates to drop — but if mortgage rates do decline meaningfully, it could send new buyers flooding into the market, pushing up home prices.

“You’ve got an entire generation of pent-up demand,” Liniger says. “We’re in this fascinating position of tremendous demand and too little inventory. When interest rates do start to come down, it’ll be another boom-and-bust cycle.”

NAR’s Yun notes that some once-hot markets, like Austin, Texas, have seen small declines in prices. But he sees little chance of falling prices on a broader scale. “Prices will remain firm and will not decline on a national level,” he said.

Back in 2005 to 2007, the U.S. housing market looked downright frothy before home values crashed, with disastrous consequences. When the real estate bubble burst, the global economy plunged into the deepest downturn since the Great Depression. Now that the recent housing boom has been threatened by skyrocketing mortgage rates and lingering fears of a potential recession — Bankrate’s most recent economic-indicator survey puts the odds at 32 percent — buyers and homeowners are asking, when will the housing market crash?

However, housing economists agree that it will not crash: Even if prices do fall, the decline will not be as severe as the one experienced during the Great Recession. One obvious difference between now and then is that homeowners’ personal balance sheets are much stronger today than they were 15 years ago. The typical homeowner with a mortgage has stellar credit, a ton of home equity and a fixed-rate mortgage locked in at a low rate — in fact, a New York Times analysis from April found that, at the end of 2023, around 70 percent of U.S. mortgage holders were locked in at rates more than three percentage points below the current market rate at the time.

What’s more, builders remember the Great Recession all too well, and they’ve been cautious about their pace of construction. The result is an ongoing shortage of homes for sale. “We simply don’t have enough inventory,” Yun says. “Will some markets see a price decline? Yes. [But] with the supply not being there, the repeat of a 30 percent price decline is highly, highly unlikely.”

Existing home prices

Economists have long predicted that the housing market would eventually cool as home values become a victim of their own success. After posting a year-over-year decrease in February 2023 for the first time in more than a decade, the median sale price of a single-family home has been on the rise again, recording annual growth for 12 months in a row and reaching the highest price NAR has ever recorded in June 2024.
Overall, home prices have risen far more quickly than incomes. That affordability squeeze is exacerbated by the fact that mortgage rates have more than doubled since August 2021.

Despite prices being high, though, the actual volume of home sales has plunged, and inventories are still too low to meet demand. Homeowners who locked in 3 percent mortgage rates several years ago are declining to sell — and who can blame them, with current rates more than double that? — so the supply of homes for sale is staying tight. As a result, the correction will be nothing like the utter collapse of property prices during the Great Recession, when some housing markets experienced a 50 percent cratering of values.

“We will not have a repeat of the 2008–2012 housing market crash,” Yun said in a statement last fall. “There are no risky subprime mortgages that could implode, nor the combination of a massive oversupply and overproduction of homes.”

Ken H. Johnson, a housing economist at Florida Atlantic University, says the housing market is being pulled in two competing directions. “I think we are in for a period of relatively flat housing price performance around the country as high mortgage rates put downward pressure on prices, while significant demand from household formation and an inventory shortage place upward pressure,” he says. “These forces, for now, should balance each other out.”

5 reasons there will be no housing market crash

Housing economists point to five compelling reasons that no crash is imminent.

1. Inventories are still too low: A balanced market typically has a 5- or 6-month supply of housing inventory. NAR says there was a 4.1-month supply of homes for sale in June (actually quite an improvement — back in early 2022, that figure was a tiny 1.7 months). This ongoing lack of inventory explains why many buyers still have little choice but to bid up prices. And it also indicates that the supply-and-demand equation simply won’t allow a price crash in the near future.
2. Builders aren’t building quickly enough to meet demand: Home builders pulled way back after the last crash, and they never fully ramped up to pre-2007 levels. Now, there’s no way for them to buy land and win regulatory approvals quickly enough to quench demand, so a repeat of the overbuilding of 15 years ago looks unlikely. “The fundamental reason for the run-up in price is heightened demand and a lack of supply,” says Greg McBride, Bankrate’s chief financial analyst. “As builders bring more available homes to market, more homeowners decide to sell and prospective buyers get priced out of the market, supply and demand can come back into balance. It won’t happen overnight.”
3. Demographic trends are creating new buyers: There’s strong demand for homes on many fronts. Many Americans who already owned homes decided during the pandemic that they needed bigger places, especially with the rise of remote working. Millennials are a huge group and in their prime buying years, and Hispanics are a growing demographic also keen on homeownership.
4. Lending standards remain strict: In 2007, “liar loans,” in which borrowers didn’t need to document their income, were common. Lenders offered mortgages to just about anyone, regardless of credit history or down payment size. Today, lenders impose tough standards on borrowers — and those who are getting a mortgage overwhelmingly have excellent credit. The median credit score for new mortgage borrowers in the the first quarter of 2024 was an impressive 770, the Federal Reserve Bank of New York says. “If lending standards loosen and we go back to the wild, wild west days of 2004-2006, then that is a whole different animal,” says McBride. “If we start to see prices being bid up by the artificial buying power of loose lending standards, that’s when we worry about a crash.” Quite the opposite: A recent Federal Reserve survey of senior loan officers reveals that lending standards have actually tightened even further in anticipation of heightened demand when rates eventually drop.
5. Foreclosure activity is muted: In the years after the housing crash, millions of foreclosures flooded the housing market, depressing prices. That’s not the case now. Most homeowners have a comfortable equity cushion in their homes. Lenders weren’t filing default notices during the height of the pandemic, pushing foreclosures to record lows in 2020. And while there has been an uptick in foreclosures since then, it’s nothing like it was.

All of that adds up to a consensus: Yes, home prices are pushing the bounds of affordability. But no, this boom shouldn’t end in bust.

Source

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Yet, even as sales stalled amid elevated mortgage rates and home prices, one silver lining emerged—more resale inventory entered the market, which has begun to put some downward pressure on the pace of home price growth.

Other good news for home shoppers is the decline in the median price for a new home—now below the median resale home price—even as builders continue offering incentives to lure buyers.

Nonetheless, experts say the housing market will only see renewed momentum once mortgage rates drop enough to ease buyer affordability obstacles and incentivize homeowners locked in at low rates to move.

Housing Market Forecast for 2024

Experts insist the housing market will improve despite high mortgage rates, out-of-reach home prices and sluggish sales transactions amid dampening demand.

Unfortunately, hopeful buyers continue to see a delay in this yearned-for transformation, thanks to several ongoing headwinds. One is inflation taking its sweet time cooling off, further delaying the Federal Reserve from cutting the federal funds rate.

Mortgage rates indirectly track this benchmark interest rate banks use as a guide for overnight lending. Consequently, with the federal funds rate at its highest level in over two decades, mortgage rates—and borrowers—are feeling the added impact on their ability to afford a home.

Meanwhile, U.S. home prices remain unaffected by persistently high mortgage rates, posting an annual 6.3% gain in April, according to the latest S&P CoreLogic Case-Shiller Home Price Index. Even as this annual gain marked a slowdown from the 6.5% gain in March, the index still broke the previous month’s record high.

Many experts expect a Fed rate cut will help stimulate the housing market, but it remains unclear when—and if—even a single cut will occur in 2024.

Will the Housing Market Finally Recover in 2024?

For a housing recovery to occur, several conditions must unfold.

“For the best possible outcome, we’d first need to see inventories of homes for sale turn considerably higher,” says Keith Gumbinger, vice president at online mortgage company HSH.com. “This additional inventory, in turn, would ease the upward pressure on home prices, leveling them off or perhaps helping them to settle back somewhat from peak or near-peak levels.”

Of course, mortgage rates would need to cool off, which seems promising given the recent declines. The average 30-year fixed mortgage rate remained consistent in July, coming in at 6.78% for the week ending July 25, a minor increase from 6.77% the previous week.

However, when mortgage rates finally go on the descent, Gumbinger says don’t hope they cool too quickly. Rapidly falling rates could create a surge of demand that wipes away any inventory gains, causing home prices to rebound.

“Better that rate reductions happen at a metered pace, incrementally improving buyer opportunities over a stretch of time, rather than all at once,” Gumbinger says.

He adds that mortgage rates returning to a more “normal” upper 4% to lower 5% range would also help the housing market, over time, return to 2014-2019 levels. Yet, Gumbinger predicts it could be a while before we return to those rates.

NAR To Implement Settlement Agreement Changes in August

Following years of litigation, the NAR has agreed to pay $418 million to settle a series of high-profile antitrust lawsuits filed in 2019 on behalf of home sellers. The settlement received preliminary court approval in April. A judge is expected to grant final approval in November. Meanwhile, NAR announced that the new required practices will go into effect on August 17.

The required new rules prohibit broker compensation offers on multiple listing services (MLS), the private databases that allow local real estate brokers to publish and share information about residential property listings.

Moreover, sellers will no longer be responsible for paying buyer broker commissions—upending an accepted practice that has been in place for years—and real estate agents participating in the MLS must establish written representation agreements with buyers.

If you sold a home in the past ten years, you may be eligible for a small piece of this settlement pie. Visit realestatecommissionlitigation.com for more information about filing a claim.

Housing Inventory Forecast: When Will There Be Sufficient Supply To Reduce Prices?

Despite more resale homes entering the market, the inventory shortage remains severe and likely will for some time, thanks to multiple headwinds.

For one, many homeowners remain “locked in” at ultra-low mortgage rates, unwilling to exchange for a higher rate in a high-priced housing market. Consequently, demand continues to outpace housing supply—and likely will for a while.

“I don’t expect to see a meaningful increase in the supply of existing homes for sale until mortgage rates are back down in the low 5% range, so probably not in 2024,” says Rick Sharga, founder and CEO of CJ Patrick Company, a market intelligence and business advisory firm.

New home construction has provided some relief, but not enough to fill the inventory gap meaningfully.

The U.S. remains 4.5 million homes short, up from 4.3 million a year ago, according to Zillow analysis.

Entry-level home supply is particularly dire, contributing to an ongoing cycle of propped-up demand and inflated prices.

Here’s what the latest home values look like around the country.

Home Builder Sentiment Dips

Builder sentiment continues to wilt with the summer heat.

High mortgage rates and sticky inflation are largely to blame for the dampened outlook for new construction, with builder confidence sliding from 45 to 43 in May, according to the most recent National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This is the second consecutive month of downward movement and negative sentiment.

A reading of 50 or above means more builders see good conditions ahead for new construction.

Meanwhile, the construction of new homes, which had been on a tear, helping to fill the hole left by scant resale inventory, has slowed.

Permits for new single-family homes fell to their lowest seasonally adjusted annual rate since June 2023 amid builder blahs, dipping 2.9% month-over-month in May, according to the latest data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD). Housing starts were down 5.2%, and completions slid 8.5% from April.

However, there’s a silver lining for hopeful buyers—25% of builders slashed prices in May to boost sales, and more were open to offering incentives.

Residential Real Estate Stats: Existing, New and Pending Home Sales

Current and anticipated home sales transactions fizzled across the board in May thanks to scorching-high mortgage rates. Here’s what the latest home sales data has to say.

Existing-Home Sales

Existing-home sales dipped 0.7% in May, according to the latest report from NAR, marking the third straight month of declines as ascending mortgage rates and home prices deterred potential buyers. In May 2023, home buyers could get a mortgage rate well over half a percent lower at a time when homes were also more affordable.

Sales also fell 2.8% compared to May last year.

Experts believe home sales activity will perk up once inflation eases and the Fed finally starts to cut interest rates. Nonetheless, many prospective buyers—particularly first-time and lower-income home shoppers—will likely be left out in the cold, with the median price for an existing home in May soaring 5.8% from a year ago to a new record high of $419,300.

“Home prices reaching new highs are creating a wider divide between those owning properties and those who wish to be first-time buyers,” said Lawrence Yun, chief economist at NAR, in the report. “The mortgage payment for a typical home today is more than double that of homes purchased before 2020.”

One upside to fewer sales is that resale inventory has been loosening since December. The latest NAR data shows inventory growing 6.7% month-over-month, logging 1.28 million unsold homes at the end of March. Still, only 3.7 months of inventory remain at the current monthly sales pace. Most experts consider a balanced market between four and six months.

New Home Sales

Meanwhile, new homes are also not invulnerable to high mortgage rates despite their shiny appeal.

Amid mortgage rates hovering close to or above 7%, May sales of newly constructed single-family houses plunged 11.7% 4.7% compared to April and 16.5% from a year ago, according to the latest U.S. Census Bureau and HUD data.

The good news for prospective buyers is that the slow pace of new home sales puts new home inventory at a level not seen since early 2008, according to Lisa Sturtevant, chief economist at Bright MLS.

“Buyers that remain in the market are starting to have more leverage, and sellers of existing homes are increasingly offering concessions, including help with closing costs and money toward repairs,” said Sturtevant.

Moreover, those shopping for new construction will be happy to hear that the median price for a new home in May fell $500 to $417,400—nearly two thousand dollars below the median existing-home price.

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Prices began falling last June, but are still higher than they were a year ago. Now, as demand appears to be coming back into the market, due to a slight drop in mortgage rates, prices are pushing back.

In December, the latest read, U.S. home prices were 6.9% higher year over year, according to CoreLogic. That was the lowest annual appreciation rate since the late summer of 2020. Last April, annual price appreciation hit a high of 20%.

Falling home prices were reflecting weaker housing demand, as inflation, job cuts and uncertainty in the economy piled onto the barrier put up by higher mortgage rates. But mortgage rates began to fall in December, and prices reacted immediately. The cooling continued, but not as much as in the months before.

“While prices continued to fall from November, the rate of decline was lower than that seen in the summer and still adds up to only a 3% cumulative drop in prices since last spring’s peak,” said Selma Hepp, chief economist at CoreLogic.

Early spring market surge?

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