The 2023 Housing Market Recession: Is a Crash Looming?

Following the COVID-19 pandemic, the historically low interest rates that were set by the Federal Reserve caused buyer interest to spike. Homes could now be purchased at a relatively low cost when taking interest rates into account. In this situation, many sellers were receiving competing bids that drove home prices up and allowed sellers to earn a sizable profit.

Since early 2022, interest rates have been driven up by the Federal Reserve for the purpose of curtailing inflation and the adverse effects of it. Today, interest rates are still high, which has caused buyer demand to decrease substantially. Even though homes have retained most of their value in recent months, they are beginning to show a decline, which indicates that the U.S. market is slowing down.

The real estate market was in a growth phase for a lengthier period of time than anyone anticipated. According to the National Association of Realtors, the median home value across the U.S. reached more than $400,000 for the very first time in early 2022. The reason why home values are only now starting to drop is because many potential buyers can no longer afford the high price alongside a high interest rate. In this scenario, bidding wars have become a thing of the past, which means that sellers often receive an offer that’s at or below listing price.

Because of the drop in buyer demand and the uncertainty in the economy, some people are wondering if a real estate market crash is right around the corner. At the moment, market analysts expect the market correction to be more of a modest one, which means that it shouldn’t come close to resembling the crash that took place during the Great Recession. This article offers a closer look at the state of the 2023 housing market and the potential for a recession.

Slowdown in the U.S. Housing Market

There are several signs that the U.S. housing market may be slowing down. At the very least, home values may have peaked since prices have been declining year-over-year for the past three months. While home values won’t drop forever, these three months of data are a strong indicator of current trends.

You should expect the real estate party that was characterized by constant bidding wars and soaring home prices to come to an end in the near future. Recently, Elon Musk predicted that there would be a potential meltdown in commercial real estate that would be followed up by a downturn in home values. Musk posted these thoughts on Twitter in late May.

In mid-June, Fed Chairman Jerome Powell stated that he was paying close attention to the housing market. Powell understands that interest rates play a sizable role in the real estate market, which is part of the reason why he didn’t announce an interest rate hike for the first time since early 2022. The next few weeks will give us a better idea of what impact the rate hike pause will have on the national housing market. There’s a possibility that it could cause prices to level off.

There are several reasons why the decline in home values won’t be as severe as the type of decline that occurs during a crash, the primary of which is that there isn’t enough inventory at the moment. While some markets will experience sizable price declines, the supply is lacking across almost all markets. If supply far outstripped demand, the fears of a market crash would be more relevant.

A Moderate Downturn Expected

As touched upon previously, housing economists and analysts anticipate that a modest correction will take place instead of a severe crash. In February, home values decreased year over year for the very first time in well over a decade. However, home values have still increased at a much higher rate in comparison to income, which is why many buyers are currently unable to afford a home.

The current situation differs from the Great Recession since homeowners have better financial positions. Builders are also taking a more cautious approach, which makes it less likely that an influx of inventory will be placed on the market in the near future. Experts believe that a significant price decline is highly unlikely.

Factors Supporting Market Stability

Low inventory levels and a tight supply-and-demand equation are contributing to ongoing price pressures. Inventory levels are low because homeowners who were able to lock in extremely low interest rates after COVID-19 aren’t going to be putting their homes on the market anytime soon. Since inventory is low, a slight drop in demand among buyers doesn’t equate to a substantial decrease in home values.

Along with builders being more cautious to increase the pace of construction, another reason for low to moderate inventory is because of a limited amount of land availability. When you combine these factors, there isn’t much risk that overbuilding issues will occur.

Market stability is also reinforced by current demographic trends, strict lending standards, and low foreclosure activity. There’s a high demand for homes among millennials and Hispanics. Both of these demographics are becoming a larger part of the market.

As for lending standards, they were exceedingly lax before the 2007 market crash. At this time, borrowers would be approved for loans without needing to document their income. Even if a borrower had a poor credit history or didn’t provide a down payment, they had a good chance of being approved for a loan. Today, most lenders have tough standards that borrowers must meet if they want to receive a mortgage. For instance, most borrowers have great credit scores. The average credit score for a borrower in 2023 is around 765. Stricter lending standards significantly lower the possibility that borrowers will miss payments.

As for foreclosure activity, home values dropped sharply during the 2007-2008 financial crisis after millions of foreclosures occurred. These homes flooded the market, which is why prices dropped as quickly as they did. For many new homeowners who were able to secure their mortgages with low interest rates, there’s a much lower chance of missed payments.

Housing Market Statistics

To get a better understanding of the current state of the housing market, there are some statistics that you should keep in mind. For one, home sales declined from the previous month and experienced a steeper decline in comparison to the previous year. From March to April, home sales dropped by 3.4%. When comparing April 2022 with April 2023, home sales declined by more than 23%.

In April 2023, the median sale price on a single-family home in the U.S. was just under $390,000, which represents a year-over-year drop of 1.7%. In order for the housing market to be balanced between sellers and buyers, there needs to be a five to six month supply of homes. As of April, there was just a 2.9-month supply of housing inventory, which means that demand is unable to be met.

Affordability Concerns and Future Outlook

While the market has become slightly more balanced over the past six months, affordability remains the primary challenge as home prices have increased at a faster rate than incomes. If buyers can’t afford to make an offer, they will be more inclined to consider renting an apartment or room in a single-family home.

Experts acknowledge that there’s a high potential for additional price declines over the next six months. However, these same experts believe that a gradual recovery should begin towards the latter portion of 2023. The market’s overall stability is expected to prevail due to various factors that differentiate the current situation from the Great Recession. If you’re looking to purchase a home in the near future, now is a good time to do so. Even though interest rates are high, home values are lower than they have been in many months.

Conclusion

The U.S. housing market is experiencing a slowdown following a prolonged period of record-breaking growth. Even though home values have declined and there are legitimate concerns about the possibility of a recession, experts agree that a severe crash similar to the Great Recession is unlikely to occur.

Factors like strong homeowner balance sheets, low inventory, strict lending standards, muted foreclosure activity, and cautious building practices contribute to market stability. One challenge that must continue being navigated is affordability. However, demographic trends and ongoing demand support the housing market and indicate that it remains healthy.

Overall, the consensus among housing economists is that the market will experience a moderate downturn rather than a catastrophic collapse as we venture into the latter half of 2023. It’s important to monitor the market closely and stay informed about economic indicators and trends that will assist you when buying or selling a home. Despite the challenges that persist, the housing market is expected to recover gradually, providing opportunities for sellers, buyers, and investors alike.