I’ve been active on Twitter over the past year, and things have changed, and to my surprise (not sure why it’s really surprising), I’ve encountered a lot of residential bears on the platform.
Many were/are still convinced that the next real estate crash was imminent.
The reasons vary, whether it is due to lower Airbnb home prices, a higher share of investor purchases, higher mortgage rates, lack of affordability, lower home sales volume, high inventory, etc.
The reasons seem to change with each passing year, all without a housing market collapse…
Now that we’re in the middle of 2024, the next obvious question is: Will the housing market crash in 2025? Next year is definitely the year, right?
But first, what is a housing crash?
The term “housing collapse” is subjective, and there is no clear definition that everyone agrees on.
For some people, what happened in 2008 is the same as what happened in 2008. Housing prices are falling nationwide, millions of homes are defaulting on their mortgages, homes are being sold at discounted prices, properties are being foreclosed on, and so on.
For others, it may just be a big drop in home prices. But how big is that drop? And where?
Are we talking about national housing prices, regional prices, a metropolitan area, a state, or the country as a whole?
Personally, I don’t think it’s a matter of housing prices collapsing just because they’re falling. Although falling nominal (not inflation-adjusted) prices are rare.
Over the past few years we have seen what are called home price corrections, where prices have fallen by 10%.
In 2022, we appear to be in a housing correction, defined as a decline in prices of 10% or more, but not more than 20%.
On the surface, this means that a drop of 20% or more is much worse, and may be real. housing collapse.
But we have to look at the damage associated with that. If home prices fall by 20% and there aren’t many distressed sales, is that still a collapse?
Some might argue that there is no other outcome if prices fall that low. They may be right. In fact, a collapse is bound to have dire consequences.
If Joe sells his house for $500,000 instead of $600,000, it’s not necessarily a disaster if he had bought it for $300,000 a few years earlier.
He’s obviously not happy about this, but it’s not a problem if he can still sell through traditional channels and even make a good profit.
Of course, this means that others who had to sell will not be so lucky, because the purchase price will likely be higher.
However, this is contingent on a significant drop in prices, which is historically uncommon outside of the global financial crisis.
Stop comparing now to 2008.
One thing I see a lot is comparing today’s housing market downturn to 2008. This seems to be the key step in the dovish forecast guide.
I get it, it’s the most recent example and therefore seems the most important. But if you haven’t been there and lived it, you simply can’t understand it.
If you weren’t, it’s hard to tell then from now. But if you were, it’s crystal clear.
There are countless differences, though they are quick to ridicule those who say “this time is different.”
I could go on about this all day, but it’s best to focus on a few key points.
Currently, housing affordability is weak thanks to a combination of high home prices and equally high mortgage rates, as shown in the chart above from ice.
Despite the huge rise in prices over the past decade, high mortgage rates have done little to slow the party down.
Yes, the rate of increase in home prices has slowed, but given the fact that mortgage rates have risen from less than 3% to 8% in less than two years, the situation is expected to be much worse.
There is simply no real correlation between home prices and mortgage rates. Home prices can rise together, fall together, or move in opposite directions.
Now, proponents of a housing market collapse often point to buying conditions. nowIt’s a terrible time to buy a home from a payment-to-income ratio perspective. I don’t necessarily disagree (it’s very expensive).
But this completely ignores the current homeowner pool. As such, this is a completely different thesis.
You can say that now is not a good time to buy, but the average homeowner is in good shape. These statements can coexist, even if everyone wants you to take sides.
See the entire world of homeowners
To put this into perspective, let’s consider millions of current homeowners along with potential home buyers.
The average homeowner today has a 30-year fixed mortgage with a fixed interest rate of 2-4%.
In addition, most of them purchased their properties before 2022, when housing prices were much lower.
Therefore, the typical homeowner has a very low interest rate and a relatively small loan amount, which together represents a very attractive monthly payment.
To make matters even better for the foundation of the housing market, existing homeowners, most of whom have very low loan-to-value ratios.
They also had boring old 30-year fixed rate loans, not optional variable rate loans or some other crazy loan program that wasn’t sustainable, as we quickly discovered in 2008.
These homeowners did not exploit their equity to the extent that homeowners did in the early 2000s, even though the equity in their homes reached record highs (see above).
This is partly because banks and mortgage lenders are more stringent today. And partly because mortgage rates are being capped. They don’t want to give up low mortgage rates.
In other words, lower mortgage rates not only make mortgage payments cheaper, they also discourage them from taking on more debt! More of each payment goes toward paying off the principal, making these loans (and their borrowers) less risky.
Some people have turned to home equity loans and home equity lines of credit, but again, these loans are much more restrictive, typically capped at 80% of the combined loan-to-value (CLTV) ratio.
In 2006, the typical homeowner did a cash-out refinance to 100% of the CLTV value (no equity left!) while new homebuyers were coming in with no down payment as home prices soared to record highs.
Take a minute to think about this. And if that’s not bad enough, consider taking out a mortgage at that time. Declared income, no paperwork, etc.
So you almost had it. All homeowners have full debts. With a complete lack of proper underwriting.
Home sales decline in the face of weak affordability is actually healthy.
This brings us to home sales, which have been falling since the introduction of higher mortgage rates. This is natural because lower affordability leads to lower transactions.
The concern here is that when this happens, supply may outstrip demand, causing housing prices to fall.
Instead, we have seen falling demand meet falling supply in most urban areas, causing housing prices to rise, albeit at a slower pace.
While housing market pessimists may claim that the low volume signals a collapse, it is actually just evidence that it is difficult to afford to buy a home today.
Now the same tricks we saw in the early 2000s that led to buying a home you couldn’t afford no longer apply. You actually have to qualify properly to get a mortgage in 2024!
If lenders had the same risk tolerance as they did in 2006, home sales would continue to flow even as mortgage rates rose to 7% or 8%. Prices would rise to ever higher levels.
This surge in home sales in the early 2000s, shown in the chart above, is Trading EconomicsThis wasn’t supposed to happen. And fortunately, it’s not happening now.
At the same time, existing homeowners will withdraw their money in large numbers, adding more risk to an already risky housing market.
Instead, sales have slowed and prices have moderated in many markets. Meanwhile, existing homeowners are sitting on their hands, making boring 30-year mortgage payments.
With any luck, we will see more balance between buyers and sellers in the housing market in 2025 and beyond.
More inventory for sale at prices people can afford, without a toxic financing crash like we saw in the previous cycle.
Prior to creating this site, I worked as an account manager for a wholesale mortgage lender in Los Angeles. My experience working in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) home buyers better navigate the home loan process. Follow me on Twitter for the latest news.
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