Is a Housing Market Recession Upon Us? Here’s What You Need to Know

At the end of 2022, the falling housing prices and low activity indicated a sharp decline in home prices. But the housing market has been resilient throughout this year, and the warnings of a housing recession have not materialized.

The current housing market may be experiencing low activity and decreasing prices compared to the peak in 2021 and 2022, and many have warned of a housing recession. However, with new evidence, a housing recession seems debatable.

While demand for housing has fallen, so has the supply. Demand is measured by mortgage rate applications which is at a multi-decade low. However, the lack of inventory has kept housing prices relatively high based on wages.

After the last housing crisis in 2008, home prices were around 90 times the average income. By 2022 they rose to 138 times income which is perceived to be unsustainable. However, other countries like Canada and New Zealand have even higher price-to-income ratios.

This affordability and shortage crisis has kept the prices high despite interest rates rising quickly. Additionally, many high net worth earners are still active in real estate syndications due to the price reset. Due to the amount of quantitative easing, there is estimated to be over $5 trillion on the sidelines, ready to invest in real estate.

The past few months of 2023 indicate a reversal in that trend with increasing housing prices.

The Current State of The Housing Market

According to Goldman Sachs, at the beginning of the year, nearly everyone agreed the weak activity and falling real estate prices were signs of a housing market recession. On the other hand, real estate crowdfunding has done exceptionally well.

Yet, the first half of 2023 is over, and the recession prediction hasn’t panned out.

There are three main reasons for that:

  1. Low activity in the market
  2. Housing prices remain relatively high
  3. Low activity

The housing market is experiencing low activity in 2023. Housing sales dropped 18% from June 2022 and decreased 3% from May to June 2023.

Two factors influence the current low activity in the housing market: rising interest rates and low housing inventory.

Rising Interest Rates

According to Freddie Mac, the average rate for 30-year fixed mortgages between June and July 2023 was just under 7% at 6.82%. High rates have a double-sided effect on buyers and sellers.

Buyers are hesitant to buy at the higher interest rates. And sellers are avoiding a new mortgage at a significantly higher interest rate.

According to Redfin, 90% of current homeowners have a mortgage rate below 6%, 80% are below 5%, 60% are below 4%, and 20% are below 3%. Additionally, there is more single-family home rental inventory. Those who could afford to buy another house can leave their primary residence as an investment rental to not lose a once-in-a-lifetime rate.

Low Housing Inventory

Low housing inventory is not new, but it reached historical levels in 2023. A recent report estimated the housing market will be short nearly 4 million houses in 2023. The imbalance of supply and demand keeps home prices high.

While in many markets prices have fallen, they have started to rise in some parts of the country. Sale prices increased most in Milwaukee, Miami, Cincinnati, Newark, New Jersey, and Anaheim, CA, and overall prices increased by 2.1% compared to last year.

So why do prices remain high? Although the activity levels in the housing market are low compared to peak levels in 2022, the demand for housing remains high.

This combination of limited supply and high demand often causes bidding wars on homes for sale. According to a recent National Association of Realtors report, approximately one in three buyers pay more than the initial asking price.

Most experts believe the housing market will correct itself, and it has been. Since June 2022, housing prices have consistently decreased. Existing homes’ average mean sales price was $534,700 in June 2022. In October 2022, the average sales price dropped to $489,000; in February 2023, it reached its lowest at $462,400.

But, since February 2023, prices have started to increase again, with the average mean sales price in March of $486,300, May of $503,100, and most recently in June of $536,100.

As many experts suspect, the housing market did experience a correction, but because of the lack of inventory, those prices are unlikely to fall much lower than the current trends in 2023.

The Affordable Housing Crisis in 2023

The current housing market is experiencing an affordability crisis. The latest data from the National Association of Home Builders shows the following data:

  1. 29% of households in 2022 can’t afford a home worth $150,000
  2. Only approximately 20% of households can afford a home worth $150,000 – $250,000
  3. 73% of all U.S. households can’t afford the median-priced new home of $425,786 in 2022

A new study by the National Associate of Home Builders (NAHB) determined the impact of increasing prices and interest rates on the housing market:

  1. A $10,000 increase in the median house price would price out approximately 1.4 million households
  2. A 25 basis point added to the mortgage rate at a 30-year fixed rate of 6.25 would price out around 1.3 million households from the market

While prices have decreased since their peaks in 2021 and 2022, that trend has reversed, and prices have increased again since February 2023.

The current housing prices, mortgage rates, and limited supply of homes make it very difficult for the average American to buy homes.

In the latest Housing Affordability & Supply report by the National Association of Realtors (NAR), households earning $75,000 (the median household income in the U.S.) can afford to buy a home up to $256,000. The problem is only 23% of listings are under $256,000.

This shortage of affordable housing becomes significantly worse in larger states with a high cost of living, such as Washington, Florida, and California. These states have significant population migration and are strong economies. They also have fewer homes being built per capita, which constrains supply.

A Housing Market Recession Is Unlikely

Don’t hold your breath waiting for the next housing recession or prices to fall significantly. There could be a housing market recession as the market experienced two significant peaks and troughs in property prices, and we may see a second downturn in prices.

Speculative buying, low-interest rates, and accessible lending practices fueled the 2008 crash. Moreover, economic instability, coupled with potential changes in government policies and rising interest rates, could tip the scales and trigger a downward spiral in property values.

Vigilance and proactive measures are essential to avert a potential catastrophe and ensure a more stable and sustainable housing market in the future.

While it’s tempting to look at the mansion next door and try to keep up with the proverbial Joneses, try to avoid this and buy great deals in this recession.

Lastly, if a real estate investment in a house is outside your comfort zone, cash-flowing land investments are another stable opportunity.

Although activity is lower than in previous years, prices may have already corrected themselves and have started to increase slightly in 2023. While the threat of ongoing inflation, rising mortgage rates, and an economic recession may increase the chances of a housing market recession ever so slightly.

A housing market recession is unlikely. Limited supply and strong demand continue to keep housing prices high. Yet, the housing market is facing an affordability and supply crisis. The current market has a limited supply of houses the average household can afford.

This article originally appeared on Wealth of Geeks