Dreaming of a Housing Market Crash?
As the FED pushes the envelope on interest rate and mortgage rate rises, many buyer prospects continue to hope for a housing market correction with lower prices.
Well okay, they would prefer an outright crash. Because prices are unreachable no matter what mortgage rates are. And it will take quite a lowering of rates to unlock homeowners from their current mortgage. Refinancing is out of the question.
And how likely is a crash though with economists predicting a soft landing for the economy? We’re seeing a slowdown in resale home purchases, yet demand remains far above supply, and buyers still have a lot of money to put toward a home purchase. New homes are selling like hotcakes.
What Could Crash the Housing Markets?
Current theories involve housing price bubbles, that would suddenly collapse as demand disappears. Definitely, this is a price bubble caused by artificial supply restraints. And buyer demand is slowing due to central bank action, yet it’s subtle over time, which actually decreases the possibility of a bubble burst.
What might be the catalyst to give buyers hope?
- trade split with China goes wrong
- consumer savings and confidence reach a tipping point
- war activity with Russian and China scares investors
- recession accelerates worker layoffs
- Republicans won’t let Dem’s spending spree continue
- Dems can’t pay big debt interest payments coming due
- small businesses collapse
- sudden rise of interest rates due to inflation and government financing crisis
- political mismanagement severely reduces confidence in the economy
- speculative over-leveraged buyers in trouble
- excessive, new home construction
- banks won’t lend and buyers can’t get mortgage insurance
- some cities such as San Francisco, New York, Boston, New Jersey, Chicago lose their tax base and can’t fund operations (crisis)
- mortgage rates drop and a wave of homeowner decide to sell their properties before prices fall
These prospects aren’t so positive and how would buyers qualify for a loan under a recession? It may be the biggest threat isn’t from mortgage holders. It may be the macro-threats of an indebted government that might threat number 1.
Market Cooling – July Sales Slide Again
Across the US, existing-home sales slid 2.2 after a 3.3% in July, after a previous drop in June, and we have to remember that homes sales fell hard by 18.9% June 2022.
Median home prices still rose 1.9% to $406,700, a record for July, an oddity when sales are dropping. Home inventory grew 3.7% from June. First time homebuyers are buying more (up to 30% of purchases in July).
So a lack of inventory is driving prices up
Demand is the story of residential real estate (i.e., single-family houses) as all buyer age groups continue to pine for houses. Multifamily units are pouring onto many markets but not all. There will be a glut and if the economy coughs, this could send prices tumbling. However, apartment/condos aren’t considered an ideal long-term solution for many buyers. Buyers like yourself still pine for houses for the equity and security of ownership.
Buyers and sellers are aware of the demand for houses. Given new house construction has been literally crushed through high mortgage rates, land and material costs, and adverse regulations on development, homeowners are setting ultrahigh listing prices.
As this chart from CAR showing the California housing market, half of buyers are getting their price.
Jobs and wage rates are holding pretty well. Many buyers do have funds and that means strong competition for good homes that become available. It’s a tough situation for most buyers.
There really isn’t a solid case for a housing market crash right now. The FED might overshoot and push the economy into recession but even that wouldn’t be enough to obliterate demand and set a cascade of foreclosures and divestments forward. The biggest threat, and maybe a catalyst is high energy prices and continued high rent prices. That could put a big crunch on consumer spending which in turn launches the lower employment/wage effect. A $100 oil price could do it.
Fannie Mae’s Home Purchase Sentiment Index (HPSI) increased in May by 4.5 points. Americans feel it is a good time to buy a home increased from 48% to 52%, while those who believe it’s not a good time to buy decreased from 46% to 39%. Of homeowners, those who believe it is a good time to sell a home increased from 29% to 32%, while the percentage who feel it’s a bad time to sell dropped 3% to 62%.
Are there any plausible signals of a crash?
- FED pushing high rates too long could ruin investor and business sentiment
- mortgage holders can’t achieve acceptable refinancing (if mortgages reach 8%)
- FED makes some drastic lending rules that hit the market hard
The real issue for a potential market downturn is the economy, as high for long rates hit the business sector.
The biggest risk which many housing market experts and economists don’t talk about is a crash in tax revenue for the US government. The recent credit downgrade is a signal that the US government itself is in a fiscal mess. When the FED cuts off small businesses, they can’t pay taxes.
Besides high wage demands that won’t relent easy, you have the cost of rising energy. A fast-rising price of oil, and oil drilling is suppressed, production may not meet demand. Biden will have to pour oil out of the SPR reserves to save the day.
Yet, as I point out in the 2024 stock market outlook, there are many reasons why the high rates can’t continue, including the fact the US federal election is only 15 months away. No standing President can win an election in the midst of a downturn. Instead, with rates falling, taxes will flow, bills will get paid, and the infrastructure spending scheduled to begin in 2024 to 2027 will proceed.
See more on what’s happened during 2023 to America’s housing markets including California, Florida, Los Angeles, Boston, Dallas, Denver, Oregon, New York, and catch up on the housing market forecast for 2024.
What is Housing Crash Anyway?
And what exactly is a housing market crash?
A housing crash is a sudden devaluation of homes and a fleeing of more than just buyers, but instead a reduction that suggests something major has happened to the demand for homes.
See the 34 housing crash factors now.
A crash needs a sudden catalyst. That catalyst would likely be a big jump in unemployment, strikes, tax crisis, dropping consumer spending, and a conviction that things are going to be bad for a while. Another catalyst is if real estate finance companies collapse under the pressure of fast high rates and loan defaults. The banks however, are pretty solid and well supported by the Federal government.
How Long for Rising Interest Rates to Take Effect?
It’s understood that the negative impact of higher interest rates takes at least a year to really take effect. we’re now past that point heading into the slow selling season.
The Fed raised rates last month and reiterated further planned hikes until inflation is well down.
Mortgage rates are above 7% now and buyers are beginning to give up. Mortgage applications and refinancing applications are plummeting to all-time lows. It’s the rising rates that are drying up buyers, yet so far homes have not flooded onto the market across the country. Prices as shown below are sliding. If the recession hits as many economists predict, home prices should slide this winter.
Yet, the US economy has a lot of strength. Millennial buyer demand remains strong. Job vacancies are high, unemployment still near record lows, some buyers have money, new construction has slowed, and wages are rising, so is that enough to tide the Fed threat?
Many analysts predicted home prices would recede, but that hasn’t happened.
Dennis McGill, the Director of Research at Zelman & Associates, in an interview with Newsweek said “We do think there’s going to be home price declines on a national basis.. so we now expect about a 4 percent decline in 2023 and we expect a 5 percent decline in 2024” Not quite a crash, more like a slight moderation.
What’s happening Now
The overall weight of this year’s demand factors is pushing home prices downward — rising rates, stricter lending criteria, and buyer fears that prices will be much better next spring (after a market price slide).
Quite a few prospective homebuyers are wondering whether buying a home now is a smart move. Fannie Mae’s Home Purchase Sentiment Index (HPSI) fell 1.2 points in September to 60.8 and that was down 13.7 points compared to last September of 2021.
For some, this price slide might make it a good time, but that might be a rare situation. Most seek big financing to buy, and that won’t be forthcoming. The banks are in good financial position and they still remember 2007.
There might be some questionable lending going on, but not much.
Political actions and policies are playing the number one role in any housing market slide. As time passes, rate rises and unemployment begin to take a fall and wages sliding a little, we’ll see sales drop further in 2nd half of 2023.
Goldman Sachs says home prices would fall in 2023
Goldman Sachs released a paper entitled The Housing Downturn: Further to Fall. In it they forecasted sharp drops in 2023 in new home sales (down 22%), existing home sales (down 17%), and housing GDP (down 8.9%). Housing has slid.
And for 2023, they expect another 8% decline in new home sales, existing home sales down 14% and housing GDP to fall 9.2%).
Years ago, I predicted the economy, stock markets and housing markets would crash in 2023. The reason I missed the mark on that was because Biden was able to print money and release the SPR oil reserves. He and the Dems just kicked the can down the road and I missed that.
It takes time for the damage to accumulate like it did back in 2006. If oil prices do rocket again as supplies diminish, mortgage rates climb, and unemployment begins to rise fast, the real estate housing market will be the first to plummet.
Realistically, with so much manipulation of the markets by politicians, it is difficult to forecast anything now. A sudden reaction or whim is tough criteria to rationalize. It’s the one intangible that makes all historic, technical, and common sense forecasts useless. The government could run another multi-trillion dollar spending spree and make all the doomsday people look silly, for a while.
We’re in a Housing Downturn
Housing sales are down, and interest from buyers is well down from what it was. As you can see in the NAR chart, prices have a rhythmic upward progression. And intense rental demand really shows how frustrated Americans are about investing in a home. It’s still a smart long term life plan.
Home Prices Starting to Fall
Rising interest rates and unaffordable mortgage payments are vaporizing home buyers but home prices still haven’t fallen. Some cities are showing signs of a downturn.
Mortgage applications and refinancing activity have plummeted of late given most buyers can’t qualify or afford the new mortgage rate environment. A lot of buyers have been taken out of the market. All we need now is financial troubles in the indebted via inflation, spent savings, and perhaps lost jobs.
Zandi believes the most overvalued markets are in the South and Southwest. Homeowners in Utah, Arizona, Colorado, Idaho, Nevada, and Florida are the most nervous. Moody’s predicts these specific cities are in most trouble:
- Boise City, ID
- Colorado Springs, CO
- Las Vegas, NV
- Phoenix, AZ
- Coeur d’Alene, ID
- Tampa, FL
- Atlanta, GA
- Fort Collins, CO
- Sherman, TX
- Jacksonville, FL
- Idaho Falls, ID
- Lakeland, FL
- Greeley, CO
- Longview, WA
- Charleston, SC
- Albany, OR
- Denver, CO
- Clarksville, TN
- Greensboro, NC
- Charlotte, NC
Home prices and buyer net income going in opposite directions. Longtermtrends.com shows in their chart on the home price/median income ratio remains at record heights. This is one stat that might support the idea of “the only way is down” scenario where buyers lose their jobs and lose interest entirely.
Key Emotional Drivers of a Potential Crash
Let’s get right to the main drivers:
- American consumer sentiment is down and en masse, buyers give up on considering a purchase
- deep fears of a recession begin being confirmed by rises in unemployment, poor earnings reports, and business bankruptcies
- cost of living rises faster and FED raises rates higher
- media hype as usual for clicks and ad revenue contributes to panic
- mortgage payments simply too high to consider buying a home
- Americans spending savings for daily living cost
- credit costs keep rising including credit cards, home equity lines, and mortgage debt pressuring worried mortgagees
- builder financing costs too high thus discouraging construction
- material and labor shortages make homes more expensive
- stock market downturn ruins American’s 401k holdings making them fear risk-taking
- homeowners find a place to move to, so they can finally unload their million-dollar properties
Low Homeowner Debt Isn’t Relevant
The US real estate housing market optimists point out that homeowner debt is low and consumers are in a strong position. The unregulated factors that created the 2007 housing crisis aren’t present. And demand for homes is still very high, with many potential buyers having cash but there’s no homes to buy.
Other economists believed inflation was transitory, however rent prices for instance almost never drop and they’re rocketing right now. With interest rates going up, supply chains damaged, how can inflation not grow? Investment in rental property is a passion for many given rising rent yields and tax writeoffs. Even in a crash, they will likely see minimal changes in income for at least a year or more.
But with homes selling at ridiculous levels, sometimes a million over asking price, how much of an economic shock is needed to bring that overextending, speculative house of cards crashing down? This year, the market is expected to be strong and estimates of price growth range around 16% year over year.
In this post, we look at the factors that may bring everything down in 2023. See the 23 Major Crash Factors for the US Housing Market below.
At some future date, when pessimism rules again as it does from time to time, asset prices will decline. And if valuations across all of these asset classes return even two-thirds of the way back to historical norms, total wealth losses will be on the order of $35 trillion in the U.S. alone. If this negative wealth and income effect is compounded by inflationary pressures from energy, food, and other shortages, we will have serious economic problems.
U.S. households own real estate worth $41 trillion. Current Census data on median household incomes and median home sale prices suggest a price to income ratio of about 5.5 after accounting for a considerable estimated increase in incomes in 2021 (last datapoint was 2020). If this ratio returns to 4.0 – which is well above any levels prior to the mid-2000s housing bubble – this would be a 27% loss of value, over $11 trillion — Jeremy Grantham GMO. Title: LET THE WILD RUMPUS BEGIN* (Approaching the End of) The First U.S. Bubble Extravaganza: Housing, Equities, Bonds, and Commodities.
In a nutshell, Grantham says, based on historic indicators, that if a recession should happen and asset values are pushed back to historic norms, it will be disastrous. There is no doubt this is a bubble all built on Fed debt, but if demand for housing is high and Americans have wealth, how far could prices collapse?
The jobs reports have been great and wages are rising. Won’t this unrealized potential spend result in even higher home prices in 2024?
There are 33 signals/factors to watch below.
First Time Buyers Dropping Off
In the last two years, Covid stimulus actually boosted house prices and increased demand. Now at the end of the plague, more workers will be drawn back to the cities which is already seeing more sales of condos. Prices of condos will be supported and the pressure on house prices will be eased.
During the 12 first months of the pandemic home prices rose 15% on average across the US and that was repeated in the previous 12 months. First time buyers were hot in the mix at 34% of all sales in 2021, but dropped to 29% in August 2022.
If interest rates rise substantially, then these buyers may face big trouble with rising mortgage payments in the coming years. Mortgage payments in Los Angeles are up $200 a month year over year already and first timers are likely feeling the heat. Those who have to refinance will face steep climbs, which is refinancing is down 70%.
If the Fed raises interest rates too quickly, many overleveraged homeowners, apartment landlords, and others will be in trouble. Landlords are doing better now but it will take years for them to recover their losses from the rent default pandemic era, and rent default is still high. Could they survive another financial blow?
23 Factors to Pay Attention To
Below are 23 major housing crash factors that could play into falling home prices in 2023.
23 Major Crash Factors for the US Housing Market (revised)
- buyer fatigue builds to a truly precipitous point where any event could stop all home buying
- rising unemployment makes buyers give up on dream
- rising interest rates adds too much to the typical monthly mortgage ($690 now)
- refinancing schemes get culled by the government and foreclosures begin in 2024
- inventory in some high-tax cities begins to be dumped (New York, Boston, Chicago, Los Angeles, San Francisco)
- government enacts new tough lending rules for mortgage companies
- high rates hit small businesses hard as consumers finally pull back hard on spending
- tech sector plunges on falling consumer spending and trade issues with China
- sellers seeing all chances of making their big real estate fortune disappear with perhaps foreclosure a possibility and they’ll begin dumping homes on the market
- stock market downturn damages personal wealth estimates and some sell their real estate assets
- oil and energy prices soar and inflation rises raises cost of living
- glut of new construction multifamily units without buyers plummets prices
- speculators believe it’s time to fully back out of the housing market
- China/US conflict sends stock markets crashing (Taiwan invasion/war maneuvers)
- Russia steps up careless behavior in the Ukraine and confrontation with NATO happens
- economy goes into high-speed wobble inviting drastic government intervention for its debt problems
- big rise in tax on corporations and billionaires causes more wealth to flee the country
- stock market at peak volatility and earnings outlooks dive (investors tuned to earnings now only)
- bankers quickly anticipate trouble and begin tightening mortgage lending with higher rates
- the Fed has to raise interest rates too quickly in 2022 to cover debt/capital needs, and given the size of home loans, a 1% increase would create defaults and panic selling
- debt in some cities most likely to crash hits a critical point
- massive student loan and personal debt defaults as unemployment rises
- yield curve inverts again severely thus scaring the financial community
It’s Not the Same as the Financial Crisis/Crash
Economic and lending circumstances today are different. There are no mortgages to zero income zero down payment people, fewer mortgage holders are underwater, homeowners have more savings and stock market portfolios are hefty.
Technical financial factors are often spoken about by economists and brokerage companies and bankers. But in each case, the issue is dissolved when the government prints money and kicks the problem down the road. Like someone in Vegas with a credit card, the consequences are waiting for them back home later on.
A Few Housing Market Experts Expected Demand to Fall
The US administration as mentioned, could take a hard line to crash the economy, but it would cost the election. Biden has woven such a complex web of problems, that there’s no way out. Crushing the economy would take demand way down to ease inflation, home prices, and more. Yet inflation is likely not to fall so fast.
Should you sell your house fast this summer? Well, you should hire a Realtor with a solid real estate marketing capability to help you get what the market will bear. 2023 poses a threat in that stimulus money may slow in that year. As things slow, speculators may give up on real estate. Construction may pick up and interest rates could rise thus easing the competition for houses for sale.
The Timeline of Housing Market
This scary looking roller-coaster timeline of market corrections and crashes indicates that when the next one does happen, it could be horrific. We have to consider what keeps the cart on the track and what will send it plunging.
Some homebuyers still haven’t recovered from their losses in the 2008 collapse (caused by defaults on consolidated mortgage-backed securities). Their home values plunged 30% and over 9 million lost their homes. Right now, 2.7 million homes are in mortgage forbearance.
Those who wish to refinance will be looking at big hikes, and a good portion of mortgage holders are deeply indebted. And we’re not at the end of rent moratoriums, and we know most renters won’t be able to pay back the rent they owe.
Crash forecasts are revolving around interest rates and government bankruptcy, but the real threat this time is government meddling. The US administration thinks it has control of the macroeconomic factors, and that a mountain of debt and regulation squeezes, high energy costs, and rising taxes aren’t a problem.
Commercial real estate is in severe trouble without stimulus because cities won’t be the same after the pandemic. That debt issue isn’t going away, when companies realize workers aren’t coming back to their highly overpriced offices. And many businesses are buried in huge debt going into the economic recovery.
The economy is rocketing (will reach 10% growth) but putting the breaks on just your dragster is ripping down the runway is not good. Some would call this a high speed wobble, where there is no control.
Once the governments get really scared (will New York City go bankrupt?) they’ll restrict mortgage qualifications, raise interest rates, which begins the process. Once everyone sees where the economy’s headed they start bailing out.
When Do Housing Bubbles Burst?
Markets always slide right after they reach big bubbly price highs which don’t match what consumers can afford, and as supply increases and buyers and mortgage holders lose their jobs. And buyers keep spending big with bubble cash. An event or series of small uncontrollable financial events can cause housing purchase demand to retreat as people withdraw from big-ticket purchases.
A stock market crash could coincide with the housing event and stock prices are highly inflated, not supported by real earnings.
This could be all about hyperinflation, political mistakes, and baffling complexity. This situation is novel, just like Covid 19, which means fear and misunderstanding will sweep in like a cold winter wind. The fact is, most Americans cannot protect themselves. They are at the full mercy of the economic machine.
This out of date graphic from NAR shows a trend that is continuing — high rent growth with wage stagnation. The situation for renters is unbearable, as more Americans find themselves homeless.
Printing Money Out of Control
By printing trillions of hand out money, inflation was the result. Biden isn’t done doing that sort of thing which feeds dependency, inflation, higher home prices, higher mortgage payments, higher US debt payments and a conflict with conservatives.
The issue of money printing is only one factor. The out of control spending now taking place, was well beyond the imagination of financial experts when they warned about spending. The national debt is about $32 Trillion now, a number no one forecasted or imagined, so the issue of US crashes is real, not a fear tactic.
The US is maxxing out its credit cards. What happens now?
Cities such as Austin, Dallas, Houston, Los Angeles, San Diego, Los Angeles, Baton Rouge, Bismarck, Anchorage, Casper, Midland, Lafayette, Bakersfield, are cities most likely to crash. The cities of New York, Chicago, and San Francisco are in a poor financial state so floating these cities will drain state and federal funding. In California, the debt troubles and social malaise are shocking. That beautiful place looks more and more like a battle zone with homeless encampments throughout the state.
How Vulnerable is Your City?
Yet, investors and homebuyers should still be concerned about a housing bubble in their cities. Not all states have recovered from the last recession, nor benefited from any Obama era Federal government policies.
In late 2021, could the Fed ratchet up interest rates to pay for all the stimulus? In fact, almost every recession, housing downturn, or major catastrophe has been aided by fast rising interest rates. These rate spikes kill off business and put extreme pressures on mortgage holders. Markets collapse quickly then interest rates are quickly lowered.
This transition to a US centered economy over many many years, still puts the country into a vulnerable period of uncertainty and GDP risk. Will companies build factories here or instead hold off and hope for a Trump loss in 2020?
Unfortunately, “soft landings” after rate hike cycles are as rare as unicorns and virtually all modern rate hike cycles have resulted in a recession, financial, or banking crisis. There is no reason to believe that this time will be any different — Forbes report.
Crashes Historically Follow Price Bubbles
“Don’t we learn from history?” Perhaps history can only tell us whether the housing market 2020 is headed on a downward path, but can’t really say when or how it will happen, which cities might crash.
Zillow polled 100 economic experts about the economy and they believed a recession was coming in 2020. It would have happened if the Covid pandemic hadn’t occurred. Have we seen the end of stimulus inflation? More stimulus would create more inflation and trillions more are already stuffed into the money supply. That money still in stocks, crypto, and bank accounts could start chasing too few houses in 2022 leading to an event in 2023.
Check the stats and forecasts for the Denver housing market crash, Chicago housing market crash, Boston housing market crash, San Francisco housing market crash, Philadelphia housing market crash, and New York housing market crash.
Cities Most Likely for a Downturn
Are you looking for the best cities to invest in real estate or to avoid those metros most likely to crash? The best cities to buy rental properties gives you a peak at the potential of rental property investment.
Rising mortgage rates, inflation, reduced housing supply and high home prices threaten the markets, it appears 2002’s real estate scene will stay strong. Realtors may want to build their presence this year as house prices decline in 2023. Lower prices will bring plenty of homes onto the real estate market and boost your opportunities.
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