The Future of the Housing Market

The relentless ascent of property prices continues to vex potential homebuyers, seemingly impervious to the highest mortgage rates witnessed in nearly 23 years. July witnessed another round of price hikes, as indicated by the latest S&P CoreLogic Case-Shiller home price index, with 19 out of 20 markets in the analysis revealing month-over-month gains. In a further reflection of this ongoing surge, the National Association of Realtors (NAR) reports that median home prices in September were nearly 3 percent higher than the previous year, marking the third consecutive month of year-over-year increases.

The idea of a “housing recession” that would reverse the substantial price gains in homes had gained traction. The U.S. housing market had shown signs of slowing down towards the end of 2022, and it appeared that home prices were poised for a correction. However, an unexpected turn of events occurred on the path to a housing downturn—home values resumed their upward trajectory. NAR data reveals that median sale prices for existing homes are currently near record highs. September 2023’s median price of $394,300, while slightly lower than the all-time high of $413,800, represents the highest figure ever recorded for the month of September. It’s worth noting that seasonal fluctuations often make June the highest-priced month in most years. In the words of Lawrence Yun, NAR’s chief economist, “The housing recession is essentially over.”

Even as mortgage rates have surged to 8 percent, reaching levels not seen in over 23 years, home values have remained robust. The primary culprit is a chronic shortage of housing supply, with NAR’s September data revealing a paltry 3.4-month supply.

Rick Arvielo, the head of mortgage firm New American Funding, aptly sums up the situation, stating, “You’re not going to see house prices decline. There’s just not enough inventory.” Skylar Olsen, chief economist at Zillow, concurs, underscoring the supply-and-demand imbalance. Her latest forecast predicts that home prices will continue to rise into 2024, a development welcomed by sellers but presenting challenges for first-time buyers aiming to enter the realm of homeownership. According to Realtor.com’s September 2023 Housing Market Trends Report, high mortgage rates have driven up the monthly cost of financing a typical home, post a 20 percent down payment, by 12.4 percent since the previous year. This equates to an additional $256 in monthly payments compared to what a buyer would have seen in September of the prior year. Danielle Hale, chief economist at Realtor.com, acknowledges the challenges that buyers face, asserting, “Buyers still struggle with the triple threat of rising listing prices, record-high mortgage rates and limited inventory, making affordability a continued concern.”

In sum, housing economists and analysts widely concur that any market correction is likely to be modest. The scale of price drops experienced during the Great Recession is not anticipated. The fundamental reason lies in the equation of supply and demand, with more buyers than sellers ensuring that a substantial price decline remains improbable. Mark Fleming, chief economist at title insurer First American Financial Corporation, encapsulates this situation, stating, “There are more people than housing inventory. It’s Econ 101.”

Dave Liniger, the founder of real estate brokerage RE/MAX, explains that the rapid escalation of mortgage rates has created an atypical market scenario. Many prospective buyers have been waiting for rates to decrease. If interest rates do indeed decline, it could trigger a surge of new buyers into the market, thereby pushing up home prices. Liniger observes, “You’ve got an entire generation of pent-up demand. 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.”

Comparisons to the housing market bubble of 2005 to 2007, which was followed by a disastrous crash, have been raised. When the real estate bubble burst, it led to the most severe global economic downturn since the Great Depression. The recent housing boom had been under threat due to skyrocketing mortgage rates and the looming possibility of a recession, as indicated by Bankrate’s expert survey, with odds standing at 46 percent. In light of these factors, prospective buyers and homeowners are pondering the question—when will the housing market crash?

Key housing market statistics:

According to Bankrate’s weekly national survey of large lenders, the average mortgage interest rate on a 30-year loan reached 7.99 percent as of October 18, the highest level since August 2000.

Home sales fell by 2 percent from August 2023 to September 2023, according to the National Association of Realtors. This represents a 15.4 percent decline since September of the previous year.