As the famous investor Warren Buffett once said, “Predicting rain doesn’t count; building arks does.” This quote is particularly relevant when addressing the question, “will the housing market crash?” and more specifically, the concerns surrounding the possibility of a housing market crash in 2023 or 2024.
While it’s natural to speculate about the future of the market, what’s most important is that potential buyers and investors take proactive steps to protect themselves against potential risks.
Understanding the various factors that could influence the housing market’s trajectory over the next few years can help individuals make informed decisions about whether to buy, sell, or invest in property. By staying informed and prepared for potential changes in the market, individuals can build their financial “arks” and weather any potential storms that may come their way. Ultimately, the question of whether or not the housing market will crash is less important than what individuals can do to safeguard their financial futures.
It is difficult to predict with certainty if a real estate housing market crash will happen in 2023 or 2024. However, history has shown that the housing market is prone to crashes. There have been several significant housing market crashes in the past, including the most notable crash of the 1900s in 1929, which was caused by the crash of Wall Street leading to the Great Depression. As a result of the crash, property values fell up to 67% and bank lending decreased. Then there was the 2008 housing market crash which had an echo effect throughout the American economy, with some of its impact still being felt today.
It is important to note that while housing market crashes can have severe consequences for homeowners and the economy as a whole, they are not uncommon in the history of the U.S. housing market. It is also pertinent to note that the causes of housing market crashes can vary widely and can be influenced by a variety of economic and social factors.
What Causes a Housing Market to Crash
First, note that housing markets don’t just crash out of the blue. Over time, a variety of factors will start putting pressure on a market, eventually causing it to crash.
Factors that cause a housing market to bubble include:
- Low interest rates
- Rapid job growth, which increases demand
- Easy lending or inflation
When a market experiences a combination of these factors, a housing bubble may have formed which could easily pop if one of the factors is removed.
A housing market crash happens when:
- Interest rates rise too quickly
- Jobs disappear too quickly along with demand
- Loans suddenly become harder to get
- Or an economic slowdown occurs that causes massive deflation
Indicators of Housing Market Health
1. Inflation rates and mortgage rates
Inflation rates impact mortgages by influencing interest rates and borrowing costs. Higher inflation often leads to increased interest rates, raising the cost of mortgage payments for borrowers. This can potentially result in a real estate housing market crash if many people cannot afford homes and foreclosures rise. Conversely, lower inflation can result in reduced interest rates, making mortgages more affordable for homebuyers.
When inflation is low and stable, mortgage interest rates tend to be lower, making it easier and more affordable to buy homes. This can lead to an increase in housing demand, which can drive up home prices.
On the other hand, high inflation rates can lead to higher interest rates and borrowing costs, which can make it more difficult for people to afford homes. This can decrease demand for housing, leading to lower home prices.
Moderately rising inflation rates can be an indicator of a strong economy. This can lead to increased job growth and higher incomes for potential homebuyers. It can also drive up demand for housing and lead to higher home prices.
However, if inflation rises too quickly, it can lead to an overheated economy and potentially a market bubble, which can eventually lead to a market crash.
2. Unemployment and underemployment statistics
3. Consumer confidence and spending habits
Consumer confidence is a crucial factor that affects the housing market as it determines whether people are willing to take out a mortgage and purchase a home. If people lack confidence in the housing market, they may defer buying a home, which can result in a cooling down of the housing market.
When consumers have confidence in the economy and their personal financial situation, they are more likely to make big purchases such as buying a home. This can lead to an increase in housing demand, driving up home prices and indicating a healthy market.
On the other hand, when consumer confidence is low, people may be hesitant to make big purchases such as buying a home. This can lead to a decrease in demand for housing and a cooling down of the housing market.
4. Housing supply and demand
Housing supply and demand are two key factors that indicate the health of the housing market. When demand for housing is high and there is a limited supply of homes, home prices could increase – a sign of a strong market. Conversely, when there is an oversupply of homes and demand is low, this can lead to a decrease in home prices. It indicates a weak market.
If there is high demand for housing and a limited supply, we have a seller’s market, where sellers may receive multiple offers and sell their homes quickly for a higher price. This indicates a healthy housing market and can also encourage new construction and development to meet the demand for housing.
On the flip side, if there is an oversupply of homes and demand is low, we have a buyer’s market. This is where buyers have more bargaining power and may be able to purchase homes for a lower price. This indicates a weak housing market and may discourage new construction and development.
Housing supply and demand are impacted by a variety of factors, including new housing starts (the total number of new construction homes in the works), interest rates, population growth, and economic conditions.
For example, when interest rates are low, it becomes more affordable for people to take out a mortgage. This increases demand for housing as we saw in the second to fourth quarter of 2020. Similarly, if there is a population boom in a certain area, demand for housing rises, leading to a shortage of supply.
5. Home prices and affordability
When home prices are increasing at a moderate pace and homes are affordable for the majority of the population, we have a healthy housing market. On the other hand, if home prices are increasing rapidly and affordability is becoming an issue, we may have an overheated housing market.
A healthy housing market typically sees home prices growing at a sustainable rate, often in line with inflation. This allows more people to enter the market and purchase homes, which can help to drive demand and maintain a balanced market. If home prices rise too quickly, affordability issues can arise and ultimately impact demand for housing.
Home prices and affordability are impacted by external factors such as demand and supply, interest rates, government policies and economic conditions. For example, if the government implements policies that encourage home buying, we could see a boost in demand for housing. This would positively impact home prices. Similarly, a downturn in the economy can affect income growth and affordability, which then leads to a price decline.
6. Fiscal policies affecting the housing market
Analyzing Past Housing Market Crashes
The 1929 Wall Street Crash
The 1929 Wall Street Crash, also known as Black Tuesday, marked the most devastating stock market collapse in US history. It led to a decade-long economic depression known as the Great Depression. Triggered by factors such as overvalued stocks, excessive speculation, and risky investments, the crash wiped out fortunes and had severe global effects.
Causes and consequences
The 1929 Wall Street Crash was caused by a combination of factors that led to a massive speculative bubble in the stock market. Here are some of the most significant causes:
- Overvalued stocks: In the 1920s, the stock market experienced a period of rapid growth, with stock prices rising rapidly due to high demand from investors. However, many stocks were overvalued, meaning that their prices did not reflect their true worth.
- Excessive speculation: As stock prices rose, many investors began to speculate on margin, meaning that they borrowed money to buy stocks. This led to a situation where investors were heavily leveraged, meaning that a small decline in stock prices could lead to a massive sell-off.
- Bank failures: Several banks, including the Bank of the United States, failed in the months leading up to the crash. This led to a loss of confidence in the banking system and caused many investors to withdraw their money from banks, leading to a further decline in the stock market.
The Federal Reserve, the central bank of the United States, also pursued policies that contributed to the stock market crash. For example, the Fed raised interest rates from 4% to 6% in 1928 in hopes of slowing down the rapid rise in stock prices. This however depressed consumer spending, lowering production in many industries, including construction.
These factors combined to create a situation where the stock market was highly vulnerable to a massive sell-off. When stock prices began to decline in September 1929, panic set in, and many investors rushed to sell their stocks, leading to a rapid decline in stock prices. The crash had severe global effects, leading to a decade-long economic depression and devastating many lives.
Some scholars believe that the rapid increase in housing construction during the mid-1920s had already led to an excess supply of housing and a particularly large drop in construction from 1928 to 1929.
So it’s important to note that the housing market and related factors, such as mortgage rates and construction levels, were already in a state of decline before the stock market crash of 1929.
The 1990 recession
The 1990 US recession was a mild economic downturn that lasted from July 1990 to March 1991. It was triggered by factors such as high oil prices, decreased consumer spending, and a slump in the housing market. It resulted in a rise in unemployment and slowed economic growth.
Causes and consequences
The 1990 US recession was caused by a combination of factors that led to a contraction in economic growth. The key causes include:
- Oil Price Shock: Iraq’s invasion of Kuwait in August 1990 resulted in a spike in oil prices, disrupting global supply. This led to higher energy costs for businesses and consumers, negatively impacting spending and production.
- Commercial Real Estate Bubble: In the late 1980s, a speculative bubble formed in the commercial real estate market, driven by easy credit and tax incentives. When the bubble burst, property values plummeted, and many developers went bankrupt, leading to a credit crunch and a decline in construction activity.
- Tight Monetary Policy: The Federal Reserve raised interest rates in the late 1980s to combat inflation. This made borrowing more expensive, discouraging investment and consumer spending.
- Decreased Consumer Confidence: A combination of factors, including the oil price shock, high interest rates, and uncertainty surrounding the Gulf War, led to a decrease in consumer confidence. As a result, consumer spending declined, further contributing to the economic downturn.
- Corporate Debt: Many corporations had taken on significant debt during the 1980s, and as the economy slowed, they struggled to service their debt obligations. This led to a wave of corporate bankruptcies, which further weakened the economy.
As a result of the economic downturn, consumer confidence and purchasing power weakened, leading to decreased demand for housing. This decline in demand caused housing prices to fall.
While the housing bubble of 2006 affected most of the country, the 1990 bubble was limited to major metropolitan areas, such as Boston, New York, Los Angeles, San Francisco and San Diego.
Home prices reached their peak in 1989, and real U.S. home prices fell 7% from their peak until the end of 1990. The recession ended in the spring of 1991, but real U.S. home prices continued to decline for years until they bottomed out in 1997, down 14% from their 1989 peak eight years earlier.
The 2008 Global Financial Crisis
The 2008 Global Financial Crisis was a severe economic downturn triggered by the collapse of the U.S. housing market, risky lending practices, and complex financial products. It led to bank failures, massive job losses, and a global recession.
Causes and consequences
The 2008 global financial crisis was primarily caused by deregulation in the financial industry, which allowed banks to engage in hedge fund trading with derivatives. This confluence of issues within the finance industry and the broader economy led to the failure (or near-failure) of several major investment and commercial banks, mortgage lenders, insurance companies, and savings and loan associations. It also precipitated the Great Recession (2007-09), the worst economic downturn since the Great Depression (1929- 1939).
Also, The Federal Reserve, the central bank of the United States, anticipated a mild recession and lowered interest rates 11 times between 2000 and 2001. That significant decrease enabled banks to extend consumer credit at a lower prime rate and encouraged them to lend even to “subprime” customers.
The 2008 global financial crisis had severe and long-lasting consequences on the housing market. From the mid-1990s to the mid-2000s, housing prices rose rapidly and peaked in 2007 when the average price of a house in the United States reached nearly $314,000.
However, the impact of the 2008 housing market crash on housing prices was severe and long-lasting. It took several years for prices to recover, and many areas still have not returned to their pre-crash levels. The crash also led to a significant shift in the housing market, with more Americans opting to rent rather than buy homes. Furthermore, this crisis caused evictions and foreclosures to begin within months, which resulted in widespread layoffs and extended periods of unemployment worldwide.
Lessons learned from 2008 and measures taken to prevent future crises
The 2008 global recession was a watershed moment for the United States and the world. It was also an opportunity for us to learn from our mistakes and take steps to prevent future crises.
Presidents George W. Bush and Barack Obama signed into law several financial crisis mitigating measures, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Emergency Economic Stabilization Act which created the Troubled Asset Relief Program (TARP).
The Volcker Rule, named after former Federal Reserve Chair Paul Volcker, was passed in April 2014. The rule prohibits banks from taking on too much risk with their own trades in speculative markets. This legislation was proposed in response to some of the most storied institutions on Wall Street, like Lehman Bros. and Bear Stearns, going belly up because they engaged in such activities.
The rule lasted only four more years after being watered down in 2018 when current Fed Chair Jerome Powell voted to do so, citing its complexity and inefficiency. Still, banks have raised their capital requirements, reduced leverage, and are less exposed to subprime mortgages
Current State of the Housing Market
1. Home price appreciation has slowed down
The housing market correction is already underway.
At first glance, it might seem that the housing market hasn’t changed all that much since the pandemic. Home prices are still rising in some places, and many people are still struggling to afford a home.
But Goldman Sachs analysts predict that by 2024, home prices in Austin, Phoenix, San Francisco and Seattle will decrease by 19%, 16%, 15% and 12%, respectively. This is because those four cities have seen large increases in inventory and supply will match up with demand.
These predictions don’t necessarily mean that we’re about to see a major decline in home prices across the country—they just mean that some parts of the country could see smaller declines than others. However, it does look like there will be some significant differences between regions and states as far as how much their housing prices drop or increase over time.
The Federal Housing Finance Agency (FHFA) reported that its seasonally adjusted purchase-only house price index fell 0.2 percent month over month in January. The CoreLogic Case-Shiller’s 20-City Home Price Index posted a 0.6 percent month over month decline in home values.
The FHFA reported that home values rose 5.3 percent year over year, down from a 6.7 percent annual gain in December, while the CoreLogic Case-Shiller 20-City Home Price Index posted a 2.5 percent year over year increase in home values, down from a 4.6 percent gain in December.
So we might see a deceleration in month over month home appreciation until a 3.5% stable rate of appreciation is reached.
2. Steady increase in jobs and wages
The Bureau of Labor Statistics estimates that nominal wages grew 0.3 percent in March, and over the last 12 months they have risen by 4.2 percent.
The unemployment rate has also fallen to 3.5 percent, and job growth averaged 345,000 jobs per month in January, February, and March (up from 284,000 in the prior three months of October, November, and December). The labor market’s resilience has helped sustain consumer spending.
However, this trend means that the Fed could potentially continue to raise interest rates above its previous peak of 5.1% and keep them there for a while.
3. Foreclosures are up but many homeowners aren't overleveraged and have enough equity.
Homeowners are in a better position now than they were in 2020, with more equity and less debt.
The Federal Reserve estimated that homeowners’ equity decreased 0.7 percent, or $226 billion in the fourth quarter of 2022 for the first time since the first quarter of 2012. Homeowners’ equity increased 0.2 percent, or $63.3 billion, in the third quarter and now stands at nearly $31 trillion. Changes in home prices are the primary driver of gains or losses in equity.
4. Housing supply is still low with declining home builder sentiment
The National Association of Home Builders (NAHB) reported that confidence among homebuilders fell for 12 months straight from January to December 2022, reaching levels not seen since 2012. This decline in confidence led to a significant decrease in the number of new homes being built.
In 2023, NAHB expects this negative trend in housing to continue, but predicts a recovery could happen in 2024. The combination of rising interest rates and a shortage of available homes has pushed many potential buyers to the sidelines. This means that home sales will drop until rates become more stable. See our housing market predictions for 2023 and 2024.
Will the Housing Market Crash in 2023 or 2024?
Despite the fact that there are some troubling trends in the housing market, we’re likely not going to see a crash in 2023 or 2024. While house prices are likely to drop, demand for housing caused by America’s ongoing housing shortage is likely to keep prices relatively stable.
Additionally, while interest rates have risen recently due to a stronger economy and expectations of higher inflation, they aren’t expected to rise much further. In fact, it’s possible that rates will actually decline over time as the economy slows down again. If this happens, then mortgage payments could actually become lower than they are today—which would help keep home prices from falling too far or too fast.
How To Prepare for a Possible Housing Market Crash
But as whispers of a potential housing market crash in 2023 or 2024 grow louder, it’s crucial to equip ourselves with the knowledge and strategies to navigate these uncertain times. Here are some ways to safeguard your investment and protect your financial future.
Strategies for Homeowners
1. Mortgage planning and refinancing options
2. Home maintenance and improvements to maintain value
By keeping their homes in top condition and making strategic upgrades, homeowners can maintain or even increase the value of their property, regardless of market fluctuations. Here are some ways to use home maintenance and improvements to prepare for a housing market crash:
- Regular maintenance: Consistent upkeep can prevent major issues from arising and help maintain your home’s value. This includes basic tasks such as cleaning gutters, changing HVAC filters, and inspecting the roof for damage. Maintaining a well-kept home will also appeal to potential buyers if you decide to sell your property.
- Prioritize energy efficiency: Energy-efficient upgrades can lead to long-term savings on utility bills and appeal to environmentally conscious buyers. Consider installing double-pane windows, upgrading insulation, or investing in energy-efficient appliances. These improvements can also help you qualify for energy tax credits, which can offset the costs of the upgrades.
- Focus on curb appeal: First impressions matter, especially in a competitive housing market. Enhance your home’s curb appeal by painting the exterior, updating landscaping, or installing a new front door. These relatively low-cost improvements can increase your home’s value and make it stand out from other properties.
- Update high-traffic areas: Kitchens and bathrooms are key selling points for homes. Invest in updates that will make these spaces more functional and visually appealing. This can include replacing outdated appliances, installing new countertops, or updating cabinetry.
3. Diversifying investments and assets
A well diversified portfolio consists of investments that don’t move in the same direction. This helps manage risk and losses. One investment can go down while another rises because of specific economic factors.
Real estate, gold and other asset classes that tend to be viewed as safe havens during economic downturns go up in value when stocks and bonds are on a downward trend.
Interest rates tend to fall during recessions as the U.S. Federal Reserve aims to boost the money supply and help the economy recover. That can make recessions an appealing time to use leverage by investing in real estate–although this can also carry risks so you have to do careful due diligence. Join RealWealth to gain access to real estate market experts and sound investment advice.
Strategies for Investors
1. Analyzing real estate investment opportunities
Keep up-to-date with current market trends, economic indicators, and industry news to better understand the factors influencing the housing market. This includes monitoring interest rates, job growth, and inflation, as well as government policies that may impact the real estate market.
Research the specific area where a property is located to determine its potential for growth and stability. Look for factors such as population growth, job opportunities, and infrastructure developments that can impact a property’s long-term value.
2. Long-term versus short-term investing strategies
3. Risk management and portfolio diversification
In conclusion, the question “will the housing market crash in 2024 or 2023” isn’t the right one to ask. As we’ve explored, economic indicators, government policies, and demographic trends point towards a more moderate adjustment in the housing market, rather than a catastrophic collapse. As always, it’s essential to stay informed and make well-reasoned decisions in the ever-evolving landscape of real estate investments. Check out our list of 22 best places to invest in real estate right now.