The Resilient U.S. Housing Market: Why It Won’t Crash

The U.S. housing market has been on a rollercoaster ride in recent years, with soaring property prices, fluctuating mortgage rates, and concerns about a potential crash. However, despite the economic uncertainties and rising mortgage rates, the housing market continues to defy expectations, proving its resilience.

Strong Price Growth Continues

Property prices have shown remarkable resilience, steadily increasing even in the face of challenges. According to the latest S&P CoreLogic Case-Shiller home price index, home prices experienced a 2.6 percent jump in August, marking the seventh consecutive month of gains. The National Association of Realtors (NAR) reported a nearly 3 percent increase in median home prices in September, making it the third month in a row with year-over-year jumps.

Lawrence Yun, Chief Economist at NAR, confidently declares that the “housing recession is essentially over.” Median sale prices for existing homes remain near record highs, with September 2023’s median price of $394,300, the highest ever for that month.

The Supply Challenge

One key factor fueling the housing market’s resilience is the persistent lack of housing supply. Despite soaring mortgage rates, housing values have remained stable. Mortgage rates reached an astonishing 8 percent, the highest in more than two decades, yet the market has not buckled under the pressure. The culprit is the limited housing inventory, with NAR’s September data revealing only a 3.4-month supply.

Rick Arvielo, head of mortgage firm New American Funding, states, “You’re not going to see house prices decline; there’s just not enough inventory.” Skylar Olsen, chief economist at Zillow, concurs, predicting that home prices will continue to rise into 2024, which may be great news for sellers but poses challenges for first-time buyers.

Rising Mortgage Rates and Costs

While it’s evident that high mortgage rates have impacted the market, the extent of this impact should not be overstated. According to Realtor.com’s October 2023 Housing Market Trends Report, high mortgage rates have increased the monthly cost of financing a typical home by 7.4 percent compared to the previous year. However, this increment amounts to a manageable $166 more in monthly payments for buyers.

Why the Housing Market Won’t Crash

Supply and Demand Dynamics

The primary reason behind the housing market’s resilience is the basic economic principle of supply and demand. As Mark Fleming, chief economist at First American Financial Corporation, aptly summarizes, “There are more people than housing inventory. It’s Econ 101.” With more buyers than sellers, a significant price decline remains unlikely.

Dave Liniger, the founder of real estate brokerage RE/MAX, points out that the rise in mortgage rates has created pent-up demand. If rates eventually decline, it could trigger a surge of new buyers, further driving up home prices.

Key Housing Market Statistics

To gain a clearer picture of the market’s current state, it’s essential to consider several key statistics:

• Mortgage interest rates have reached 7.95 percent, the highest level since August 2000.
• Home sales fell 2 percent from August 2023 to September 2023.
• The nationwide median sale price in September 2023 was $394,300, the highest September median on record.
• Housing inventory remains low, with only a 3.4-month supply in September.
• Foreclosure activity is at a low level, down 2 percent year-over-year.

Why a Crash Is Unlikely

Strong Fundamentals

The fundamental differences between the current market and the pre-2008 crash era are striking. Homeowners today possess robust personal balance sheets, with stellar credit, substantial home equity, and fixed-rate mortgages secured at rates below 5 percent.

Cautious Builders

Builders have learned from the past and have been cautious in their construction pace. This has resulted in a continued shortage of homes for sale, as there simply isn’t enough inventory to meet the demand.

New Buyers and Demographic Trends

Demographic trends are playing a vital role in driving housing demand. Households have been forming at a steady pace, while both existing homeowners and millennials are keen on homeownership.

Strict Lending Standards

Lending standards have become more stringent since the Great Recession, with lenders requiring excellent credit for mortgage approval. This stands in stark contrast to the lax lending standards of the mid-2000s.

Muted Foreclosure Activity

Unlike the years following the housing crash, foreclosure activity remains low. Most homeowners have built substantial equity in their homes, and lenders are more cautious about foreclosure filings.

In conclusion, while the U.S. housing market faces affordability challenges, a significant crash is improbable. The interplay of supply and demand, strict lending standards, a shortage of inventory, and other factors suggest that the market’s resilience will likely persist. While some moderation in price growth may occur, it is unlikely to resemble the catastrophic declines witnessed during the Great Recession. The housing market, it seems, is here to stay, riding the waves of economic change with confidence.