A lot of people are still referring back to the Great Recession of 2008, when the housing market crashed and destroyed our economy. We keep on comparing the current housing market and saying that it is similar to what happened then, and speculating that we are heading into the exact same scenario.
What I want to share with you is the exact opposite. There is no crash based on all the data we can find right now, and a lot of those speculations about a 2008 repeat are based on emotions and wishes that there was a crash because prices are so unaffordable for a lot of people.
However, this is where we are right now. Will it change? I don’t know. Can it change? Of course, it can. But I don’t want you to predict way into the future and think that there’s a crash when there’s nothing there right now.
Despite the divide in opinions, the housing market is still pretty good, pretty healthy, and heading into a neutral market.
This is a great article by Fortune magazine called "What the housing market correction will do to home prices in 2023."
First of all, that is way into the future. How do we even know what is going to happen when people just a few months ago were predicting that rates wouldn’t go up past 5%?
But, Fortune dives deeper into the question, “What does the ‘housing correction’ mean for US home prices?” and examined revised housing forecasts published by different sources: Capital Economics, Mortgage Bankers Association, Fannie Mae, CoreLogic, Moody’s Analytics, and Zillow.
According to the article, this is what the "optimistic crowd" believes.
Zillow thinks we’re going to end the year (a 12-month span from May 2022 to May 2023) with around a 10% increase in home prices.
According to the article, “Among the six forecast models we examined, every single one predicts we’ve entered into a period of decelerating home price growth. Fortune calls it "The Great Deceleration.” However, note that the word used is deceleration, not decrease.
The article continues to say, “Between May 2022 and May 2023, Zillow predicts US home prices will jump another 9.7%." Just four months ago, Zillow was predicting that year-over-year home price growth would hit 17.8% next year. In just four months, Zillow has slashed its price growth outlook by 8.1 percentage points. The reason? The U.S. housing market is slowing—fast. "
Obviously, with new data input, that forecast will be adjusted, but I still think 10% is high.
Fortune also says that “Zillow is clearly the only housing bull left.” Everyone else is saying either “Hey, it’s going to crash” or “We’re heading into something more normal.”
This is what other sources predict:
“Over the coming year, CoreLogic predicts U.S. home prices will rise 5.6%. In 2023, the Mortgage Bankers Association and Fannie Mae forecast U.S. home price growth of 3.1% and 3.2% respectively. If any of those forecasts come to fruition, it would mean the U.S. housing market returned to a period of normalized growth.” (Source: Fortune)
If you remember, just two or three weeks ago, Jerome Powell, Chairman of the US Federal Reserve, said that prices might still go up.
He said, “The supply of finished homes, the inventory of finished homes that are for sale, is incredibly low. Historically low. So, that is still a very tight market… prices may keep going up for a while, even in a world where rates are up.”
Even though a lot of people say the Fed is the one that put us in this mess in the first place, Powell understands what is going on.
That’s what we’re looking at. One of our friends, Mike Simonsen, owner of Altos Research, provides us with data updated on a weekly basis. You can follow him on Twitter and check out the latest stats on him.
In a thread he posted on July 5th, he put up the median home list price for a single-family residence, and it has gone down a little bit to $420,000. But look at the median home price: $455,000. It is still going up.
There are price reductions that are happening fast on a national level (around 30% on average). Why? Because a lot of sellers have priced their homes high, anticipating that they can sell it higher than what the other homes in their area sold for, they had to decrease home prices a bit since the real estate market is becoming a more neutral market. That is why a lot of price cuts are happening faster.
Let’s go back to the Fortune article, and see the other side’s forecast.
Fortune says that Zillow and Capital Economics don’t see eye to eye. According to the article, “Over the coming year, Capital Economics predicts home prices will fall 5%. Historically speaking, that’s a bold prediction. Year-over-year home-price declines are incredibly rare: They only happened twice over the past half century.”
This is what Capital Economics says: “Mortgage rates are rising and will reach 6.5% by mid-2023. As a result, mortgage payments as a share of income will exceed the peak seen in the mid-2000s.” (Source: Fortune)
That’s in world economics, but look, we hear this from experts all the time. Let’s see what other experts have to say.
According to a Fox Business article on February 14th: "It still looks unlikely that rates will hit 4% this year, but it’s within the realm of possibility as we are now squarely in the 3%+ range on 30-year fixed conventional mortgages," said Robert Heck, vice president of mortgages at online broker Morty.
What does that tell us? It really just shows that even experts can’t predict accurately what is going to happen. That is why going back to the data is very important to get an objective view of what is actually happening.
There are a lot of things outside of our control, such as what these would look like: unemployment and interest rates (especially as far into the future as mid-2023).
Now take a look at what Mark Zandi, Chief Economist at Moody’s Analytics, says.
“Over the coming year, Moody’s Analytics predicts U.S. home prices will jump 0%. However, Zandi says significantly ‘overvalued’ housing markets—like Boise and Phoenix—should see house prices fall by 5% to 10%. But that prediction assumes no recession. If a recession hits, Moody’s Analytics predicts a 5% decline in national home prices and a 15% to 20% decline in significantly ‘overvalued’ regional housing markets.” (Source: Fortune)
Let me remind you of something that I think a lot of people forget about.
Let’s take a look at the last six recessions the US has gone through. According to data from CoreLogic and The Balance (compiled by Altos Research), a recession doesn’t necessarily mean a decline in the housing market. In fact, home prices went up in recessions experienced during 1980 (6.1%), 1981 (3.5%), 2001 (6.6%), and 2020 (6.0%).
The only exceptions were the recessions of 1991 and 2008, where home prices declined by 1.9% and 19.7%, respectively. Even then, 2008 is an exception among exceptions because the fundamentals of the economy due to lending practices were off the rails—a phenomenon we are not seeing in the mortgage world today.
So, a recession wouldn’t automatically mean the housing market is going to crash, or home prices will tank as much as 15% to 20% as Moody’s is predicting. From the existing data that we have, there is no established correlation between the two.
And another thing to consider is inventory. In Mike’s tweet, the total inventory of actual homes for sale (single-family residences, as of July 5th) grew by 7%, or 475,530 homes. Compared to the 2015 inventory, which is 1.18 million units, we are still severely under-supplied.
People are still worrying about “What happens if we go into a recession? How does that affect unemployment?” and there are so many ifs here. Based on what’s happening now, the housing market wouldn’t tank.
The point is, I don’t agree with the prediction by Moody’s. I think it is a bold prediction.
Let’s take a little look at the historical home price growth in the US.
Fortune quotes Mark Twain in the article, “The past does not repeat itself, but it often rhymes.”
This is what most likely will happen, this is a snippet from Fortune’s article:
As baby boomers aged into homeownership, the 1970s U.S. housing market went into overdrive. Throughout the decade, builders put up as many suburban homes as they could muster. It wasn’t enough. By the end of the 1970s, the supply and demand mismatch had sent U.S. home prices up a staggering 167%. That period, of course, saw something we’re seeing once again today: an inflationary wave. By the early 1980s, the Federal Reserve had tamed the inflation beast through higher interest rates. Those spiked mortgage rates—which topped out at 18% in 1981—pushed the housing market into a brief year-over-year nominal home price decline in 1982. However, it wasn’t a housing crash. Instead, the housing market was able to return to a balanced market by the mid-1980s following several years of strong income growth. (Source: Fortune)
This is more similar to what we are experiencing now.
The demand is too high and the supply can’t match it, pushing home prices (and inflation) up.
The Fed tried to tamp down inflation by raising interest rates, and mortgage rates increased. (Luckily, we still haven’t gone up to 18% because that would destroy all of us because the home prices today don’t match the home prices back in the 1980s.)
Then there was a short period of year-over-year home price decline, BUT it wasn’t a housing crash.
What happened then was, the market was able to catch up and return to equilibrium, followed by a few years of strong income growth.
That is what we are looking at right now: Not a crash. Simply a slight downturn in some areas (Remember: Real estate is regional.), and hopefully some breathing space to return to a more balanced and normal housing market.