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There is little debate whether the Federal Reserve’s inflation-fighting tactic was effective in cooling down the hot pandemic housing market.
For the first time in 131 months, home prices fell year-over-year in February, ending the longest price growth streak. However, the median price of a home increased month-over-month for the fourth consecutive month in May. The median existing-home price in May rose to $396,100, a which is 3.1% lower than the previous May’s median price of $408,600, according to data released in June by the National Association of Realtors (NAR).
Meanwhile, elevated mortgage rates − which have doubled since early last year − have constrained homebuyers’ purchasing power. Instability in the banking sector, headlines about layoffs, and growing recession risks are also causing prospective homebuyers to hold back.
So, does this mean a housing crash could be on the horizon? Housing experts don’t believe that to be the case.
“Despite uncertainty in the economy and the housing market right now, there is little to suggest that the housing market is poised for a crash,” says Bright MLS Chief Economist Lisa Sturtevant. “For a plunge in home prices—like we saw in 2008, for example—we would need demand to pull back dramatically and/or supply to increase significantly.”
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Has the housing market slowed down?
While housing prices have dropped slightly year-over-year since February, a lack of inventory and a strong jobs market have contributed to stubbornly high home prices despite much higher mortgage rates.
“The housing market cannot compare to last year’s intense spring home buying market,” says Jessica Lautz, NAR deputy chief economist and vice president of research. “However, there is strong demand for housing. In the last month one-third of homes sold above the listed price and the typical home received three offers.”
Properties typically remained on the market for 18 days in May, down from 22 days in April but up from 16 days in May 2022. Seventy-four percent of homes sold in May were on the market for less than a month, according to NAR.
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Limited housing inventory
Inventory in the first quarter averaged 1,630,000 listings at any given time, down 40% from the first quarter of 2019, a year before the onset of the COVID-19 pandemic, according to the National Association of Realtors.
There has been limited supply as 85% of mortgage holders are locked in to sub-5% mortgage interest rates, which discourages current homeowners from selling their home and buying another at today’s elevated interest rates.
Total housing inventory registered at the end of May was 1.08 million units, up 3.8% from April but down 6% from one year ago (1.15 million). Unsold inventory sits at a 3.0-month supply at the current sales pace, up from 2.9 months in April and 2.6 months in May 2022.
“Supply is still very, very low which would keep home prices from collapsing even if we saw a downturn in demand,” says Sturtevant.
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An big influx of homes is unlikely
If there were significant job losses, we could see an increase in the number of people unable to make their mortgage payments and who would therefore have to list their homes for sale, says Sturtevant.
“However, right now, even if we do head into a recession later this year, the labor market is still extremely tight and major job losses still seem unlikely,” Sturtevant says.
New homes sales and builder confidence
Builder confidence in the market for newly built single-family homes in June rose five points to 55, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released in June.
Solid demand, a lack of existing inventory and improving supply chain efficiency helped shift builder confidence into positive territory for the first time in 11 months.
This marks the sixth straight month that builder confidence has increased and is the first time that sentiment levels have surpassed the midpoint of 50 since July 2022. Scores over 50 indicate that builders view market conditions as “good” rather than “fair” or “poor.”
The median sales price of new single-family homes in May declined to $416,300 from a median price of $420,800 in April. The median home price in April of 2022 was $458,200.
“New home prices have adjusted lower due to higher interest rates, despite a post-covid 38% increase for construction costs,” says National Association of Home Builders Chief Economist Robert Dietz. “New home prices were down 8% year-over-year in April. That will likely be the end of that price adjustment.”
The fact that single-family builder sentiment has increased every month of 2023 is signaling a bottom is forming for single-family housing starts, with a rebound set to begin later this year, says Dietz.
Is a housing market crash likely?
Experts agree that even if there’s a price correction, it will not be as dire as the 2007–09 housing crisis in terms of magnitude.
In the years before 2008, mortgage lenders made subprime loans to borrowers without verified income or adequate down payments while pushing risky loan products. This time, tough loan underwriting standards are the norm even with rock-bottom interest rates, experts say.
Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.
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