Housing market not heading for crash, real estate correction likely

Housing market not heading for crash, real estate correction likely

Housing market not heading for crash, real estate correction likely

  • Talks about a likely housing bubble have intensified amid rising housing costs.
  • As buyers struggle with rising rates and home prices, demand is beginning to decline.
  • The housing market is showing signs of cooling, but a housing crash is unlikely.

Speculation about a possible housing bubble came to a head this spring.

And talking about bubbles inevitably leads to the question of whether the bubble will burst with a crash or soften back to Earth in a modest correction.

As the Federal Reserve’s decision to raise interest rates from near zero to levels not seen in nearly 13 years, this puts additional pressure on housing costs. Data from Freddie Mac shows that the average interest rate on a 30-year mortgage has now increased by more than 2 percentage points from the end of 2021.

With housing affordability down for a decade, the home-buying frenzy that has rocked the real estate market has begun — meaning a bigger shift is on the way.

“After little movement in recent weeks, mortgage rates rose again on the back of increased economic activity and incoming inflation data,” Freddie Mac chief economist Sam Khater said in a statement. “The housing market is incredibly interest-rate sensitive, so if mortgage rates suddenly rise, demand pulls back.”

If home buyer demand falls, two things could follow: a correction or a crash.

The former would lead to a gradual decline in prices to more sustainable levels, while the latter would be the result of either a rapid fall in prices triggered by widespread panic from homeowners and investors, or a wave of forced sales.

However, with homeowners now leveraging more than $9.9 trillion in equity and

mortgage lenders

enforce strict standards, the real estate market is unlikely to head into a crash, especially as it was in 2008.

This is not the housing market of 2008

The COVID-19 housing market draws many comparisons to the property market of the mid-2000s, but the two periods couldn’t be more different.

“This is not the same market from 2008,” Odeta Kushi, First American’s deputy chief economist, previously told Insider. “It’s no secret that the housing market played a central role in the Great Recession, but this market is just fundamentally different in so many ways.”

The housing bubble that led to the 2008 crisis is attributed to a combination of cheap debt, predatory lending practices and complex financial engineering, which left many borrowers with mortgages they could not afford. The situation triggered a bankruptcy crisis among homeowners and a credit crisis among investors holding bonds backed by defaulting mortgages and a global


In 2022, the real estate market is in much better shape. Nearly all US households have rebuilt their nominal net worth to pre-recession values ​​and borrowing standards have tightened, while house prices have risen.

However, despite the improvement in the market, a major imbalance between supply and demand still remains. But as buyer demand wanes amid rising costs, competition is easing — and that could mean a correction rather than a crash is on the way.

Real estate market braces for ‘soft landing’

With home buyer demand falling, the real estate market is approaching a slowdown.

According to the Census Bureau, new home sales in the US have fallen each month in 2022 and to a four-month low in March, highlighting the impact rising borrowing costs are having on potential buyers.

“Higher mortgage rates coupled with the really sharp rise in home prices are creating affordability problems for many home buyers and that will slow the market,” Mark Palim, Fannie Mae’s deputy chief economist, told Insider. “We already have a slowdown in both home sales and house price increases.”

According to real estate database Redfin, 12% of homes for sale fell in price during the four weeks ending April 3, up from 9% in 2021 and the highest share since December. But in May, the number of sellers who had lowered their offer price rose to 19%, representing the highest percentage since October 2019.

“Rising mortgage rates have taken a significant bite out of demand,” Daryl Fairweather, Redfin’s chief economist, said in a statement.

Fannie Mae’s chief economist Doug Duncan thinks the housing market is bracing for a “soft landing.”

“Mortgage rates have risen dramatically in recent months and historically, such big moves have ended with a housing market slowdown,” Duncan said in a statement. “Therefore, we expect home sales, home prices and mortgage volumes to cool over the next two years.”

As the property market cools, the fundamentals that have supported growth, such as record high house prices and equity, are likely to keep it relatively healthy. This could mean that a correction rather than a crash is on the way.