The talk of a housing bubble in the coming year seems to be at a fever pitch as rising mortgage rates continue to slow down an overheated real estate market. Over the past two years, home prices have appreciated at an unsustainable pace causing many to ask: are things just slowing down, or is a crash coming?
To answer this question, there are two things we want to understand. The first is the reality of the shift in today’s housing market. And the second is what experts are saying about home prices in the coming year.
The Reality of the Shift in Today’s Housing Market
The reality is we’re seeing an inflection point in housing supply and demand. According to realtor.com, active listings have increased more than 26% over last year, while showings from the latest ShowingTime Showing Index have decreased almost 17% from last year (see graph below). This is an inflection point for housing because, over the past two years, we’ve seen a massive amount of demand (showings) and not enough homes available for sale for the number of people that wanted to buy. That caused the market frenzy.
Today, supply and demand look very different, and the market is slowing down from the pace we’ve seen. This offers proof of the sudden slowdown so many people are feeling.
What Experts Are Saying About Home Prices in the Coming Year
Right now, most experts are forecasting home price appreciation in 2023, but at a much slower pace than the last two years. The average of the six forecasters below is for national home prices to appreciate by 2.5% in the coming year. Only one of the six is calling for home price depreciation.
When we look at the shift taking place along with what experts are saying, we can conclude the national real estate market is slowing down but is not a bubble getting ready to burst. This isn’t to say that a few overheated markets won’t experience home price depreciation, but there isn’t a case to be made for a national housing bubble.
Bottom Line
The real estate market is slowing down, and that’s causing many to fear we’re in a housing bubble. What we’ve experienced in the housing market over the past two years were historic levels of demand and constrained supply. That led to homes going up in value at a record pace. While some overheated markets may experience price depreciation in the short term, according to experts, the national real estate market will appreciate in the coming year.
If you’ve been thinking of buying a home, you may have been watching what’s happened with mortgage rates over the past year. It’s true they’ve risen dramatically, but where will they go from here, especially as the market continues to slow?
As you think about your homeownership goals and decide if now’s the time to make your move, the best place to turn to for that information is the professionals. Here’s a summary of the latest mortgage rate forecasts from housing market experts.
Experts Project Mortgage Rates Will Stabilize
While mortgage rates continue to fluctuate due to ongoing inflationary pressures and economic uncertainty, experts project they’ll start to stabilize in the months ahead. According to the latest projections, mortgage rates are expected to hover in the low to mid 5% range initially, and then potentially dip into the high 4% range by later next year (see chart below):
That could bring you some welcome relief. So far this year, mortgage rates have climbed over two percentage points due to the Federal Reserve’s response to inflation, and that’s made it more expensive to buy a home. And wondering if the rise in rates will continue is keeping some prospective buyers on the sidelines.
But now that experts say mortgage rates should stabilize, this gives you a bit more certainty about what they think the future holds, and that may help you feel more confident about your decision to buy a home.
Bottom Line
Whether you’re looking to buy your first home, move up to a larger home, or even downsize, you need to know what’s happening in the housing market so you can make the most informed decision possible.
If you’re wondering if home prices are going to come down due to the cooldown in the housing market or a potential recession, here’s what you need to know. Not only are experts forecasting home prices will continue to appreciate nationwide this year, but most of them also actually increased their projections for home price appreciation from their original 2022 forecasts (shown in green in the chart below):
As the chart shows, most sources adjusted up, and now call for more appreciation in 2022 than they originally projected this January. But why are experts so confident the housing market will see ongoing appreciation? It’s because of supply and demand in most markets. As Bankrate says:
“After all, supplies of homes for sale remain near record lows. And while a jump in mortgage rates has dampened demand somewhat, demand still outpaces supply, thanks to a combination of little new construction and strong household formation by large numbers of millennials.”
Knowing that experts forecast home prices will continue to appreciate in most markets and that they’ve actually increased their original projections for this year should help you answer the question: will home prices fall? According to the latest forecasts, experts are confident prices will continue to appreciate this year, although at a more moderate rate than they did in 2021.
Bottom Line
If you’re worried home prices are going to decline, rest assured many experts raised their forecasts to say they’ll continue to appreciate in most markets this year.
With all the headlines and buzz in the media, some consumers believe the market is in a housing bubble. As the housing market shifts, you may be wondering what’ll happen next. It’s only natural for concerns to creep in that it could be a repeat of what took place in 2008. The good news is, there’s concrete data to show why this is nothing like the last time.
There’s a Shortage of Homes on the Market Today, Not a Surplus
The supply of inventory needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued price appreciation.
For historical context, there were too many homes for sale during the housing crisis (many of which were short sales and foreclosures), and that caused prices to tumble. Today, supply is growing, but there’s still a shortage of inventory available.
The graph below uses data from the National Association of Realtors (NAR) to show how this time compares to the crash. Today, unsold inventory sits at just a 3.0-months’ supply at the current sales pace.
One of the reasons inventory is still low is because of sustained underbuilding. When you couple that with ongoing buyer demand as millennials age into their peak homebuying years, it continues to put upward pressure on home prices. That limited supply compared to buyer demand is why experts forecast home prices won’t fall this time.
Mortgage Standards Were Much More Relaxed During the Crash
During the lead-up to the housing crisis, it was much easier to get a home loan than it is today. The graph below showcases data on the Mortgage Credit Availability Index (MCAI) from the Mortgage Bankers Association (MBA). The higher the number, the easier it is to get a mortgage.
Running up to 2006, banks were creating artificial demand by lowering lending standards and making it easy for just about anyone to qualify for a home loan or refinance their current home. Back then, lending institutions took on much greater risk in both the person and the mortgage products offered. That led to mass defaults, foreclosures, and falling prices.
Today, things are different, and purchasers face much higher standards from mortgage companies. Mark Fleming, Chief Economist at First American, says:
“Credit standards tightened in recent months due to increasing economic uncertainty and monetary policy tightening.”
Stricter standards, like there are today, help prevent a risk of a rash of foreclosures like there was last time.
The Foreclosure Volume Is Nothing Like It Was During the Crash
The most obvious difference is the number of homeowners that were facing foreclosure after the housing bubble burst. Foreclosure activity has been on the way down since the crash because buyers today are more qualified and less likely to default on their loans. The graph below uses data from ATTOM Data Solutions to help tell the story:
In addition, homeowners today are equity rich, not tapped out. In the run-up to the housing bubble, some homeowners were using their homes as personal ATMs. Many immediately withdrew their equity once it built up. When home values began to fall, some homeowners found themselves in a negative equity situation where the amount they owed on their mortgage was greater than the value of their home. Some of those households decided to walk away from their homes, and that led to a wave of distressed property listings (foreclosures and short sales), which sold at considerable discounts that lowered the value of other homes in the area.
Today, prices have risen nicely over the last few years, and that’s given homeowners an equity boost. According to Black Knight:
“In total, mortgage holders gained $2.8 trillion in tappable equity over the past 12 months – a 34% increase that equates to more than $207,000 in equity available per borrower. . . .”
With the average home equity now standing at $207,000, homeowners are in a completely different position this time.
Bottom Line
If you’re worried we’re making the same mistakes that led to the housing crash, the graphs above should help alleviate your concerns. Concrete data and expert insights clearly show why this is nothing like the last time.
Whether you’re a potential homebuyer, seller, or both, you probably want to know: will home prices fall this year? Let’s break down what’s happening with home prices, where experts say they’re headed, and why this matters for your homeownership goals.
Last Year’s Rapid Home Price Growth Wasn’t the Norm
In 2021, home prices appreciated quickly. One reason why is that record-low mortgage rates motivated more buyers to enter the market. As a result, there were more people looking to make a purchase than there were homes available for sale. That led to competitive bidding wars which drove prices up. CoreLogic helps explain how unusual last year’s appreciation was:
“Price appreciation averaged 15% for the full year of 2021, up from the 2020 full year average of 6%.”
In other words, the pace of appreciation in 2021 far surpassed the 6% the market saw in 2020. And even that appreciation was greater than the pre-pandemic norm which was typically around 3.8%. This goes to show, 2021 was an anomaly in the housing market spurred by more buyers than homes for sale.
Home Price Appreciation Moderates Today
This year, home price appreciation is slowing (or decelerating) from the feverish pace the market saw over the past two years. According to the latest forecasts, experts say on average, nationwide, prices will still appreciate by roughly 10% in 2022 (see graph below):
Why do all of these experts agree prices will continue to rise? It’s simple. Even though housing supply is growing today, it’s still low overall thanks to several factors, including a long period of underbuilding homes. And experts say that’s going to help keep upward pressure on home prices this year. Additionally, since mortgage rates are higher this year than they were last year, buyer demand has slowed.
As the market undergoes this change, it’s true price appreciation this year won’t match the feverish pace in 2021. But the rapid appreciation the market saw last year wasn’t sustainable anyway.
What Does That Mean for You?
Today, the market is beginning to move back toward pre-pandemic levels. But even the forecast for 10% home price growth in 2022 is well beyond the 3.8% that’s more typical for a normal market.
So, despite what you may have heard, experts say home prices won’t fall in most markets. They’ll just appreciate more moderately.
If you’re worried the house you’re trying to sell or the home you want to buy will decrease in value, you should know experts aren’t calling for depreciation in most markets, just deceleration. That means your home should still grow in value, just not as fast as it did last year.
Bottom Line
If you’re thinking of making a move, you shouldn’t wait for prices to fall. Experts say nationally, prices will continue to appreciate this year, just at a more moderate pace.
As we take a look at the interest rates since January, we can see that is what is really defining the current real estate market right now and the volatility is a result of the moves the Federal Reserve is making to ease inflation – the enemy of long-term interest rates.
The National Bureau of Economic Research defines what a recession is and when it is. A recession is a significant decline in economic activity, spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale retail sales. Technically, a recession is 2 consecutive quarters of negative growth.
Looking all the way back to the 1940s, every time we’ve seen two consecutive quarters of negative growth, a recession has been called.
According to a survey from the Wall Street Journal that asked economists if they believe a recession will happen in the next 12 months, we can see more and more of the experts are predicting a recession. A recession is an economic slowdown where, historically, we have seen homes appreciate in value and mortgage rates fall.
In 4 of the last 6 recessions, home prices actually appreciated in value, except for 2008, which we have covered in previous monthly market updates was a fundamentally different place than where we are today.
In all 6 of the last 6 recessions, interest rates have declined.
One of the biggest reasons a housing crash is not predicted is inventory. In 2008, we had an oversupply of homes on the market – which causes home prices to fall. Today, we have an under supply – which causes home prices to rise.
We are seeing about a 3-month supply of homes (inventory). We are far, far away from the 10-month supply of homes we saw leading up to and in 2008. The typical neutral market is 6 to 7 months of supply of inventory.
Inventory can also come from new construction. Building permits and housing starts are the leading indicators (what is to come), while under construction and housing units completed are the lagging indicators (what has happened). The leading indicators are slowing down from May to June as builders are seeing mortgage rates rise. This shows further confirmation that we’re not on pace to have an oversupply.
Finally, inventory could come from distressed properties like foreclosures and short sales. The mortgage credit availability index shows how much harder it has become for someone to secure a home loan as lending standards have tightened. More qualified buyers means less distressed properties.
There are fewer and fewer foreclosures every year in this country, and especially in the past year or two due to the moratorium on foreclosures.
Looking at foreclosure activity by year, going back to 2008, we are seeing about half of the foreclosures compared to pre-pandemic numbers and less than 10% of post-2008 numbers. Lending standards have changed the game.
36% of mortgages coming out of forbearance were paid off. 45% worked out repayment plans (modifications, loan deferrals, etc) – an opportunity that homeowners didn’t have in 2008. The forbearance program changed the game. 4 out of 5 homeowners are coming out of forbearance. However, 17% have no loss mitigation plan, but mostly have enough equity to be able to sell their homes and avoid the foreclosure process. Today, there are different options, and why we won’t see a wave of foreclosures coming to the market. If all 400,000 homes in forbearance came to market, it would still be under supplied.
The increased amount of foreclosures this year could be due to the lack of foreclosures the past two years.
Today, we are in a seller’s market, but what does the rest of the year hold?
Freddie Mac, Fannie Mae, the Mortgage Bankers Association, and the National Association of Realtors® are predicting mortgage rates to waiver around the current rate with a more stabilized rate next year.
Looking at what the 7 key industry leaders are saying about home pricing, we are seeing about 10.3% home price appreciation through the end of this year. A more moderate growth than the 15% we saw last year, but still extremely healthy appreciation in most markets.
There is also a decrease in home sales due to the softening of buyer demand in light of the rising mortgage rates. The National Association of Realtors® is saying that, at the current pace of sale today, we are projected to sell 5.1 million homes in this country this year. Of course, that is a decrease considering the sales the past 2 years, which were extraordinary years in the real estate market. The 5.1 million projection puts us back in line with the pre-pandemic years of 2017-2019.
In lieu of the rising mortgage rates, Freddie Mac, Fannie Mae, and the Mortgage Bankers Association re-forecasted their home sales predictions for 2022 from 7 million to 6 million. Still a very strong number, which should hold steady as the interest rates begin to balance out.
Today there are fewer multiple offer scenarios, fewer homes selling above asking price, and the supply of homes for sale is growing – all providing a great scenario for buyers right now. We have dropped from 5.5 offers on a home in April to 3.4 in June. We’ve gone from 61% of homes selling above asking price to 51% – still competitive, but decreasing. Finally, inventory has creeped from 2.2 months supply on hand to 3.0. All three trends that should continue moving forward.
The housing market is at a turning point, and if you’re thinking of buying or selling a home, that may leave you wondering: is it still a good time to buy a home? Should I make a move this year? To help answer those questions, let’s turn to the experts for projections on what the second half of the year holds for residential real estate.
Where Mortgage Rates Will Go Depends on Inflation
While one of the big questions on all buyers’ minds is where will mortgage rates go in the months ahead, no one has a crystal ball to know exactly what’ll happen in the future. What housing market experts know for sure is that the record-low mortgage rates during the pandemic were an outlier, not the norm.
This year, rates have climbed over 2% due to the Federal Reserve’s response to rising inflation. If inflation continues to rise, it’s likely that mortgage rates will respond. Greg McBride, Chief Financial Analyst at Bankrate, explains it well:
“Until inflation peaks, mortgage rates won’t either. Without improvement on the inflation front, we don’t know where the interest rate ceiling will be.”
Whether you’re buying your first home or selling your current house to make a move, today’s mortgage rate is an important factor to consider. When rates rise, they impact affordability and your purchasing power. That’s why it’s crucial to work with a team of professionals, so you have expert advice to help you make an informed decision about your best move.
The Supply of Homes for Sale Projected To Continue Increasing
This year, particularly this spring, the number of homes for sale has grown. That’s partly due to more homeowners listing their houses, but also because higher mortgage rates have helped ease the intensity of buyer demand. Moderating buyer demand slows down the pace of home sales, which in turn helps inventory rise.
Experts say that growth will continue. Recently, realtor.com updated their 2022 inventory forecast. In the latest release, they increased their projections for inventory gains dramatically, going from a 0.3% increase at the beginning of the year to a 15.0% jump by the end of 2022 (see graph below):
More homes to choose from is great news if you’re craving more options for your home search – just know that there isn’t a sudden surplus of inventory on the horizon. Housing supply is still low, so you’ll need to partner with an agent to stay on top of what’s available in your market and move fast when you find the one. It’s not going to be easy to find a home, but it certainly won’t be as difficult as it has been over the past two years.
Home Price Forecasts Call for Ongoing Appreciation
Due to the imbalance between the number of homes for sale and the number of buyers looking to make a purchase, the pandemic led to record-breaking increases in home prices. According to CoreLogic, homes appreciated by 15% in 2021, and they’ve continued to rise this year.
Even though housing supply is increasing today, there are still more buyers than there are homes for sale, and that’s maintaining the upward pressure on home prices. That’s why experts are not calling for prices to decline, rather they’re forecasting they’ll continue to climb, just at a more moderate pace this year. On average, homes are projected to appreciate by about 8.5% in 2022 (see graph below):
Selma Hepp, Deputy Chief Economist at CoreLogic, explains why the housing market will see deceleration, but not depreciation, in prices:
“The current home price growth rate is unsustainable, and higher mortgage rates coupled with more inventory will lead to slower home price growth but unlikely declines in home prices.”
For current homeowners looking to sell, know your home’s value isn’t projected to fall, but waiting to make your purchase does mean your next home could cost more as home prices continue to appreciate. That’s why, if you’re thinking about buying your first home or you’re ready to make a move, it may make sense to do so now before prices climb higher. But rest assured, once you buy a home, that price appreciation will help grow the value of your investment.
Bottom Line
Whether you’re a homebuyer or seller, you need to know what’s happening in the housing market, so you can make the most informed decision possible.
With so much talk about an economic slowdown, some people are asking if the housing market is heading for a crash like the one in 2008. To really understand what’s happening with real estate today, it’s important to lean on the experts for reliable information.
Here’s why economists and industry experts say the housing market is not a bubble ready to pop.
Today Is Nothing Like 2008
The 2008 housing crash is still fresh in the minds of many homebuyers and sellers. But today’s market is different. Odeta Kushi, Deputy Chief Economist at First American, says:
“This is not the same market of 2008. . . . It’s no secret the housing market played a central role in the Great Recession, but this market is just fundamentally different in so many ways.”
Natalie Campisi, Advisor Staff for Forbes, explains how today’s lending standards are different than those during the lead-up to the housing market crash:
“Among the differences between today’s housing market and that of the 2008 housing crash is that lending standards are tighter due to lessons learned and new regulations enacted after the last crisis. Essentially, that means those approved for a mortgage nowadays are less likely to default than those who were approved in the pre-crisis lending period.”
Another reason today’s housing market is nothing like 2008 is that the number of people looking to buy a home still outweighs the supply of homes for sale. As realtor.com notes:
“. . . experts don’t believe the market is in a bubble or a crash is in the cards, like during the Great Recession. The nation is still suffering from a housing shortage that has reached crisis proportions at a time when many millennials are reaching the age when they start to consider homeownership. That’s likely to keep prices high.”
Bottom Line
Experts say the housing market isn’t a bubble, and we’re not heading for a crash.
There’s no denying the housing market has delivered a fair share of challenges to homebuyers over the past two years. Two of the biggest hurdles homebuyers faced during the pandemic were the limited number of homes for sale and the intensity and frequency of bidding wars. But those two things have reached a turning point.
As you may have already heard, the number of homes for sale has increased this year, and even more so this spring. As Danielle Hale, Chief Economist for realtor.com, explains:
“New listings–a measure of sellers putting homes up for sale–were up 6% above one year ago. Home sellers in many markets across the country continue to benefit from rising home prices and fast-selling homes. That’s prompted a growing number of homeowners to sell homes this year compared to last, giving home shoppers much needed options.”
This is encouraging news. More homes coming onto the market give you a greater chance of finding one that checks all your boxes.
Buyer Competition Moderating Helps Inventory Grow Even More
Mark Fleming, Chief Economist at First American, says inventory growth is happening not just because there’s an increase in the number of listings coming onto the market, but also because buyer demand has moderated some in light of higher mortgage rates and other economic factors:
“There has been a pickup in the inventory that we’ve seen recently, but it’s not from a big increase in new listings . . . but rather a slowdown in the pace of sales. And remember that months’ supply measures the inventory of sale relative to the pace of sales. Same inventory, fewer sales, means more months’ supply.”
Basically, the market is shifting away from the frenzy of buyer competition seen during the pandemic, and that’s helping available inventory grow. In their latest forecast, realtor.com also mentions the moderation of demand as a key factor and projects the inventory growth should continue:
“As rising inflation and mortgage rates bring U.S. housing demand back from the 2021 frenzy, . . . inventory will grow double-digits over 2021 and offer buyers a better-than-expected chance to find a home.”
How This Impacts You
The combination of more homes coming onto the market and a slower pace of home sales means you’ll have more options to choose from as you search for your next home. That’s great news if you’ve been searching for a while with little to no luck. Just remember, there isn’t a sudden surplus of inventory, just more homes to choose from than even a few months ago. So, you’ll still want to be decisive and move fast when you find the right home for you.
And when you do, you may be faced with less competition from other buyers too. If you’ve been waiting to jump into the market because the intensity of the bidding wars was intimidating or if you’ve been outbid on several homes, this moderation could help make the homebuying process a bit smoother. It’s not that it’ll be easy or that bidding wars are a thing of the past – that’s not the case. But it won’t feel nearly as impossible.
Bottom Line
As the housing market begins its shift back toward pre-pandemic levels, you could have a unique opportunity in front of you. With moderating levels of buyer competition and more homes actively for sale, your home search may have gotten a bit less challenging.
Experts in the real estate industry use a number of terms when they talk about what’s happening with home prices. And some of those words sound a bit similar but mean very different things. To help clarify what’s happening with home prices and where experts say they’re going, here’s a look at a few terms you may hear:
- Appreciation is when home prices increase.
- Depreciation is when home prices decrease.
- Deceleration is when home prices continue to appreciate, but at a slower pace.
Where Home Prices Have Been in Recent Years
For starters, you’ve probably heard home prices have skyrocketed over the past two years, but homes were actually appreciating long before that. You might be surprised to learn that home prices have climbed for 122 consecutive months (see graph below):
As the graph shows, houses have gained value consistently over the past 10 consecutive years. But since 2020, the increase has been more dramatic as home price growth accelerated.
So why did home prices climb so much? It’s because there were more buyers than there were homes for sale. That imbalance put upward pressure on home prices because demand was high and supply was low.
Where Experts Say Home Prices Are Going
While this is helpful context, if you’re a buyer or seller in today’s market, you probably want to know what’s going to happen with home prices moving forward. Will they continue that same growth path or will home prices fall?
Experts are forecasting ongoing appreciation, just at a decelerated pace. In other words, prices will keep climbing, just not as fast as they have been. The graph below shows home price forecasts from seven industry leaders. None are calling for prices to fall (see graph below):
Mark Fleming, Chief Economist at First American, identifies a key reason why home prices won’t depreciate or drop:
“In today’s housing market, demand for homes continues to outpace supply, which is keeping the pressure on house prices, so don’t expect house prices to decline.”
And although housing supply is starting to tick up, it’s not enough to make home prices decline because there’s still a gap between the number of homes available for sale and the volume of buyers looking to make a purchase.
Terry Loebs, Founder of the research firm Pulsenomics, notes that most real estate experts and economists anticipate home prices will continue rising. As he puts it:
“With home values at record-high levels and a vast majority of experts projecting additional price increases this year and beyond, home prices and expectations remain buoyant.”
Bottom Line
Experts forecast price deceleration, not depreciation. That means home prices will continue to rise, just at a slower pace.