Will The Housing Market Crash in 2024? Experts Give 5-Year Predictions – Forbes Advisor

Thanks to average mortgage rates remaining at more than double what they were in 2020 and 2021, and home prices staying sky-high, housing activity remains stagnant.

Existing home sales are at their lowest levels since the height of the foreclosure crisis in 2010 and mortgage demand has dropped to lows not seen in over two decades.

At the same time, we continue to live in an economically uncertain period. Household debt—led by mortgages, credit cards and student loans—recently surpassed $17 trillion. On top of that, inflation remains above the Federal Reserve’s 2% target rate and a recession is still possible in 2024.

This begs the question: Could the housing market be on the verge of a crash?

Forbes Advisor asked several housing experts for their predictions on where the housing market might head in the next five years. While most experts expect the housing market will come back into balance, there are warning signs for what may lie ahead.

Are We In a Housing Bubble?

The Federal Reserve Bank of Dallas identified signs of a “brewing U.S. housing bubble” in a 2022 report. Though the sharp increase in home prices doesn’t indicate a bubble, the report found, there are other fundamental factors to consider. These include “shifts in disposable income, the cost of credit and access to it, supply disruptions, and rising labor and raw construction materials costs are among the economic reasons for sustained real house-price gains.”

When “there is widespread belief that today’s robust price increases will continue,” the housing market becomes unhinged from those fundamentals, the Dallas Fed report revealed. “If many buyers share this belief, purchases arising from a ‘fear of missing out’ can drive up prices and heighten expectations of strong house-price gains.”

Len Kiefer, deputy chief economist at Freddie Mac, doesn’t believe the U.S. housing market is in a bubble.

“A bubble has three defining characteristics: price growth is driven by speculation, bubbles are fueled by credit expansion, bubbles pop,” Kiefer says. “While house prices grew at record rates in 2021, the reasons for the increase was not primarily speculation or credit expansion, but rather record-low mortgage rates and a fundamental shift in housing demand.”

But what about people who bought a home during or before the pandemic who are now seeing their home values decline?

Keith Gumbinger, vice president of mortgage website HSH.com, says if you bought a home for $300,000 three years ago, you could have sold it for $500,000 last year but now can only command $400,000. Still, he’s hesitant to characterize this as a “bubble pop” or a “crash.”

“It is a ‘paper loss,’ but not an actual loss,” Gumbinger says.

How Is Today Different From the 2008 Housing Market Crash?

Among the differences between today’s housing market and the 2008 housing crash is that lending standards are much tighter now 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.

“In the lead up to the Great Recession, the housing market had been fueled by rapid credit expansion, increased leverage and household expectations for house-price growth that proved to be too optimistic,” Kiefer says.

Unlike a fixed-rate mortgage, an adjustable-rate mortgage’s (ARM) interest rate changes periodically after an initial fixed-rate period. Kiefer says that homeowners who took out ARMs leading up to the 2008 crisis got hit with payment shock once the interest rates reset and many couldn’t make the higher monthly payments.

This brings up another important distinction between 2008 and today—most borrowers now have fixed-rate mortgages, Kiefer points out. As a result, even though mortgage rates have doubled, current homeowners are seeing no change in their monthly principal and interest payments.

Homeowners Remain ‘Equity-Rich’

Another key difference between today’s housing market and the 2008 housing crisis is that many more homeowners today have equity in their homes, which can help them weather a downturn. Recent data from Attom revealed that nearly half of mortgaged residential homes in the United States are still considered “equity-rich,” meaning that the combined estimated value of loan balances secured by those homes is at or below 50% of their property value.

Conversely, by late 2009, nearly a quarter of U.S. homeowners were underwater, or had negative equity, in their homes, meaning they owed more on their mortgages than what they were worth.

Borrowers saw their equity slip by 1.7% in Q2 2023 compared to the year before with an average decline of $8,700 between Q1 and Q2, according to a recent CoreLogic report. Nonetheless, home equity remains strong with the typical homeowner having gained over $100,000 in net worth since 2019, according to NAR. The national median existing-home price is roughly 48% higher than in January 2020.

Warning Signs That Could Dampen the Housing Market

Experts say that the combination of high mortgage rates, inflated home values and scarce inventory suggest that 2024 could remain a challenging year for the housing market.

“With mortgage rates at the highest level since the early 2000s and affordability at a record low, many potential buyers are priced out of the market or unwilling to buy a home in fears of home-price declines,” says Selma Hepp, deputy chief economist at CoreLogic.

On top of that, Hepp says many people who bought their house over the past two years and locked in ultra-low mortgage rates are unlikely to move anytime soon, putting additional strain on available inventory.

The Federal Reserve Is Slowing the Housing Market

The rise in mortgage interest rates is due, in part, to the efforts of the Federal Reserve to tamp down inflation, which began surging in 2021 and hit a 40-year high of over 9% in June 2022.

Federal policymakers have raised the federal funds rate—the benchmark interest rate that indirectly influences mortgage rates—11 times since March 2022 at the most aggressive pace since the 1980s.

Though the Fed paused rate hikes the past two meetings and Fed watchers believe this signals that rate increases are over, elevated rates are likely to persist, at least for the near term.

“Despite the pause, the Fed remains committed to achieving a 2% inflation rate and has signaled that [it] will not cut interest rates anytime soon,” said Dr. Lisa Sturtevant, chief economist at Bright MLS.

In the meantime, Fed Chairman Jerome Powell stated at a recent conference that if it becomes clear that the Fed’s policy is not sufficiently restrictive to bring inflation down to a sustainable 2% rate, policymakers “will not hesitate” to hike rates again.

What Would a Recession Mean for the Housing Market?

Economists at the National Bureau of Economic Research (NBER) describe a recession as a prolonged period lasting at least a few months during which there is a significant and widespread decline in economic activity.

Here are some other signs economists look for to determine when we are on the brink of or have entered recession:

• Gross domestic product (GDP) experiences two consecutive quarters of contraction or decline.
• High inflation and borrowing costs slow down spending.
• Slowdown in manufacturing and trade sales.
• Steady increase in job losses and a surge in unemployment.
• Inverted yield curve between the 10-year Treasury and short-term bonds.

In 2022, amid multiple warning signs, many economists sounded the alarm about an inevitable 2023 recession. By December 2022, inflation was still at a scorching hot 6.5%, the Fed’s benchmark lending rate had risen to a range of 4.25% to 4.5% and the 10-year Treasury and short-term bond yield curves were inverted, which is often an indicator that a recession is coming.

Yet, that recession never materialized thanks to a robust job market, rising wages, low unemployment and resilient consumer spending fueling a strong economy.

Nonetheless, signs of economic and financial stress are emerging. Inflation remains sticky, hiring is slowing down and total household debt is north of $17 trillion due to excessive spending in a high-rate, high-inflation environment. Credit card delinquencies have also reached their highest level since 2011.

Whether the data means we will enter a recession at some point in 2024 or manage a so-called “soft landing” depends on who you ask. But mortgage rates are likely to stay elevated.

“A recession could be the wild card for rates, but, for now, the prospects are for a short, mild recession in 2024, which would not bring mortgage rates down significantly,” Sturtevant said.

High mortgage rates and home prices amid a recession would push more would-be buyers out of the market.

Related: Are We In A Recession Yet?

Why the Housing Market Will Probably Not Crash

Though home prices have jumped to astronomical heights in the last few years, the general consensus among experts is that the housing market will see a correction rather than a crash, and so a sharp drop in prices is unlikely to occur.

For one, despite high inflation, the economy is holding up remarkably well.

“I don’t expect a housing market crash in 2024 as a steady economy and labor market continue to underpin household income and balance sheets,” says Danielle Hale, chief economist at Realtor.com.

Moreover, Hale explains that a housing market crash would also require something that upsets the existing housing balance, namely more supply than there is demand for homes.

Given that inventory remains extremely limited and more prospective buyers will enter the market as mortgage rates fall, it’s unlikely that supply will outpace demand anytime soon, especially to the degree that would trigger a housing market crash.

Still, Hale says there could be some pain points in 2024.

For one, if the labor market weakens to the extent that it tips the economy into recession, more homeowners may need to sell their homes to access their equity, and thus home prices would likely fall due to the increase in supply.

Another looming issue is the further weakening of commercial property valuations, which may prompt local governments to raise residential property taxes to make up for tax revenue shortfalls.

“With home valuations at or near record highs, property taxes as a dollar amount are set to rise even if tax rates are unchanged,” Hale says. “For some homeowners, this increase could be significant enough to make a move and it could potentially cause an imbalance in supply and demand that would set off price declines, but I don’t think this is a most-likely scenario.”

What Will Happen to the Housing Market After a Recession?

While economists have different projections for how likely we are to enter a recession, how severe the recession would be and precisely when it might happen, they generally agree that we’re headed for a bumpy period of some kind in 2024.

So what does that mean for the housing market once the predicted recession is in the rearview mirror? Experts expect a reset.

“As the economy slows, longer-term rates, including mortgage rates, will begin to fall from current peak levels,” Kan says. “Combined with cooler home-price growth and demographic drivers, we expect more prospective home buyers back in the market in the coming years.”

Hepp says that buyers will return, but demand will depend on how much mortgage rates decline and the level of severity of the forecasted recession.

“These would be all generations of buyers and income groups as we do continue to have a demographic tailwind that would help boost home buyer demand, Hepp says. “[S]tabilization is expected at some point in later 2023 and into 2024, depending on what happens to mortgage rates.”

Will Housing Supply Finally Recover in 2024?

The country has an acute housing supply problem—and likely will for a while.

For one, pending sales—an indicator of future existing-home sales—remain tepid. What’s more, there’s a lack of homes on the market, making housing inventory even tighter. These trends may continue, as homeowners who purchased or refinanced at rock-bottom mortgage rates during the pandemic will likely stay put for the foreseeable future. NAR reports that buyers expect to remain in their homes for a median of 15 years.

Another reason for the tight housing inventory is that people are living longer.

“Where earlier generations would have exited homeownership, Boomers keep going strong,” Kiefer says. “This keeps supply off the market.”

Though a burst of new home construction has helped to bolster inventory, it hasn’t provided enough supply to meet demand.

Builder confidence in the market for newly-built single-family homes, which rose during the first half of 2023, has lately been on the decline, largely thanks to high borrowing costs for builders and buyers, creating the worst affordability crisis in more than a decade, according to the National Association of Home Builders (NAHB).

On a more hopeful note, Blake Blahut, a Florida-based realtor with Realty ONE Group Inspiration is confident that inventory will begin to become less constrained in 2024.

“Much like 2023, it’ll be a very modest amount due to the fact many existing homeowners are committed to exceptionally low-interest rates, leading them to perceive selling their homes at this [moment] to be unwise,” Blahut says. “But I believe the real shift may occur in 2025-2026 when, hopefully, interest rates will have dropped low enough to inspire homeowners to sell and transition to more desirable living situations.”

Blahut expects a significant inventory shift to occur when mortgage rates return to the 5% range.

What Should Home Buyers Do?

Prospective home buyers face tough choices in today’s market. Thanks to high home prices and scorching hot mortgage rates, affordability is at a low not seen in roughly four decades.

Those who purchased a previously owned home at the end of October 2023 at the national median price would have a monthly mortgage payment (principal and interest) of roughly $2,270. Three years earlier that monthly mortgage payment would have been $1,030.

Demand typically spikes when rates cool. If rates cool enough to create a surge in demand, the limited housing inventory could cause prices to shoot back up, making homes unaffordable for more would-be homeowners—especially first-time buyers.

For some shoppers looking to buy a home now, this means moving away from big cities to more affordable metros. For others, it could mean stretching their budgets or compromising on house size or other amenities.

“[W]hile it may be a difficult time for prospective home buyers right now, the market conditions are much less competitive [than] they were earlier this year,” Hepp says. “[This] offers an opportunity for buyers to come in and not have to compete with other buyers and potentially even get a discount off the list price.”

On the other hand, what if you’re not ready to buy a home right now? Is there anything you should be doing to prepare for when you are ready to get back onto the house-hunting trail?

“Bulk up your savings, build your credit strength and research towns and neighborhoods which may suit your needs,” Gumbinger says.

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