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Housing Recession: Can U.S. House Price Crash Sink the American Economy?

Last Updated December 29, 2023 8:41 AM
Giuseppe Ciccomascolo
Last Updated December 29, 2023 8:41 AM
Key Takeaways
  • U.S. house prices increased but even more families struggle to pay their mortgages.
  • High interest rates addressed inflation but had an adverse impact on the U.S. housing market
  • Could the U.S. be on the brink of another housing price crash?

The housing market has long been considered a cornerstone of the American dream, with home ownership representing not only a place to live but a substantial investment in the future. However, the real estate landscape in the United States is no stranger to tumultuous shifts, often mirroring the nation’s broader economic fortunes.

In recent years, the question on many minds is whether the American economy could once again find itself at the mercy of a housing recession. This looming concern arises as housing prices experience remarkable swings, leaving both homeowners and economists in a state of anticipation and apprehension.

What Is a House Price Crash?

A house price crash, often referred to as a housing market crash, is a significant and rapid decline in the prices of residential properties. During a housing market crash, the value of homes in a particular region or on a larger scale can drop dramatically over a relatively short period. This can be caused by a variety of factors, including economic recessions, financial crises, oversupply of housing, high mortgage interest rates, or a burst housing bubble.

A housing market crash can have far-reaching consequences, affecting homeowners, real estate investors, financial institutions, and the broader economy. Homeowners may experience a loss of home equity, making it difficult to sell their properties or leading to foreclosures. Real estate investors may see the value of their investments decline, and financial institutions may face risks related to mortgage defaults. It can also impact consumer spending and economic growth.

It’s important to note that housing market crashes can vary in terms of their causes, severity, and geographic scope. While they are generally characterized by a significant drop in house prices, the specific factors contributing to a crash can differ from one episode to another.

What Causes a Property Market to Crash?

A property market can crash due to a combination of factors, and the specific causes can vary depending on economic conditions, local circumstances, and other variables. Here are some common factors that can lead to a property market crash:

Economic Downturn

A significant economic recession or downturn can lead to a property market crash. Economic factors such as high unemployment rates, decreased consumer confidence, and reduced economic growth can result in decreased demand for housing, causing property prices to fall.

Overvaluation

When property prices become significantly overvalued, meaning they exceed their fundamental value based on factors like rental income and affordability, a correction can occur. Speculative buying and excessive lending can contribute to this overvaluation.

Mortgage Crisis

A crisis in the mortgage market, such as widespread defaults on subprime mortgages, can trigger a property market crash. This was a major factor in the 2007-2008 financial crisis.

Tightened Credit

When access to credit becomes more restricted, it can reduce the number of potential buyers and slow down property sales. This can lead to a decrease in property prices.

Oversupply

An oversupply of housing, where there are more properties on the market than there are buyers, can push down property prices. This oversupply can result from overdevelopment or a sudden influx of properties.

Interest Rates

High interest rates can make mortgages more expensive, reducing the affordability of homes and potentially leading to decreased demand. This can put downward pressure on property prices.

Speculation

Speculative buying, often driven by the expectation of quick profits, can inflate property prices to unsustainable levels. When speculators exit the market, prices can plummet.

Government Policies

Changes in government policies, such as property tax hikes, stricter regulations, or the elimination of housing incentives, can have a negative impact on property prices.

Global Economic Factors

International economic events, like global financial crises, can spill over into local property markets, affecting investor sentiment and confidence.

Natural Disasters

In disaster-prone areas, like hurricane or earthquake zones, property markets can crash due to widespread damage.

However, housing market crashes can vary in their causes and impact. The factors leading to a crash can vary between situations, with varying levels of severity. Predicting a housing market crash is complex, and multiple factors often interact to create such scenarios. Real estate markets are influenced by a combination of local, national, and global factors.

How Much Does an Average U.S. House Cost?

As of the third quarter of 2023, the median home sales price stands at $431,000, reflecting a substantial 31% increase from its value at the outset of 2020 when it was $329,000.

Taking a broader view of the past four decades, the average cost of a home in the United States has exhibited a notable upward trajectory. Examining the evolution of median home sales prices over the last 40 years (figures based on January 1 of each year, unless otherwise specified):

  • From 1980 to 2020, the median home sales price surged by 416%.
  • Between 1980 and the third quarter of 2023, home sales prices have climbed an impressive 576%.
Medianl sales price of homes in the US
Median sales price of homes in the U.S.

This divergence in percentage changes is attributed to a rapid increase in home prices between 2020 and late 2022. During this period, from the first quarter of 2020 to the fourth quarter of 2022, the median home sales price experienced a remarkable 46% surge, soaring from $329,000 to $479,500. This upswing represented one of the swiftest rates of median home sales price increases in the history of the United States.

Pending Home Sales Unchanged In November

In November, pending home sales in the U.S. remained unchanged, as reported by the National Association of Realtors  on Thursday, December 28. The pending U.S. home sales index held steady at 71.6, maintaining its October level, which surpassed the consensus expectation of a 0.6% monthly decline, as cited by FXStreet . It’s important to note that an index level of 100 corresponds to the contract activity level in 2001.

Year-over-year, pending transactions recorded a 5.2% decline in July.

NAR Chief Economist, Lawrence Yun, commented: “While the decline in mortgage rates did not lead to an increase in formal contracts submitted by homebuyers in November, it did generate heightened interest, as reflected in a notable uptick in lockbox openings.”

It’s worth noting that the index is derived from a sample that encompasses approximately 40% of multiple listing service data each month.

How Can the U.S. Government Avoid a House Price Crash?

May analysts say the challenge of foreclosure externalities ideally finds solutions in the private market. However, in reality, this problem persists as a market failure, prompting the need for specific interventions. Nonetheless, it’s not enough to merely address the issue; governments also require willing buyers.

If there’s a housing development with no demand, moving people into those homes won’t enhance overall well-being.

According to experts, there needs to be a compelling case for intervening to target this externality effectively and justify the allocation of society’s resources. Foreclosure externalities are a pervasive issue, much like the neighbor who neglects to maintain their lawn, impacting those nearby.

Governments have established rules to address such issues and maintain neighborhoods. Therefore, intervening in markets through increased government spending to internalize this particular externality represents a significant decision.

It may be more cost-effective and efficient to leave it unaddressed while acknowledging that externalities, ranging from noise disturbances to unmaintained lawns, are ubiquitous and not all amenable to correction.

When Will the Fed Start Cutting Interest Rates?

The surge in key interest rates, which significantly impacts the cost of financing various purchases, from cars to homes, has propelled borrowing costs to multi-year highs. According to a recent survey conducted by Bankrate, the consensus among the nation’s leading economists is that these elevated interest rates are poised to persist for an extended period.

A substantial majority, or 94%, of economists foresee the possibility of the Federal Reserve embarking on interest rate cuts in 2024, with a smaller share, 6%, expecting such cuts to occur in 2025 or beyond. Notably, none of the experts polled anticipate rate cuts to transpire in the current year. These expectations align with the Federal Reserve’s own projections, which indicated in September that rate reductions are unlikely until at least 2024.

Median sales price sold
Median sales price sold

Top economists in the nation also anticipate a modest easing in the key 10-year Treasury yield, which notably influences longer-term debt like the 30-year fixed-rate mortgage. Over the next 12 months, this yield is expected to edge down from its 4.56% level at the time of the survey to 3.99%. Despite this decrease, it’s worth noting that this rate remains elevated and hasn’t been observed since the 2008 financial crisis.

These dynamics unfold against the backdrop of a significant bond-market sell-off in early October, with the 10-year Treasury rate surging by more than 40 basis points since the Federal Reserve’s September meeting. The key yield has now reached its highest level since 2007, and there are indications that it may continue to climb as investors prepare for the reality of prolonged higher rates.

What Could Boost A Property Price Rise?

A recent report from Goldman Sachs anticipates a 4.2% annual increase in home prices for 2023, with a more moderate but still noteworthy rise of 1.3% forecasted for 2024. However, these are forecasts, and if economic indicators take an unexpected turn, home prices might trend downward.

As previously mentioned, some experts are projecting an increase in home prices in 2024, albeit not as substantial as the current year. Yet, it’s crucial to recognize that these are projections, and there’s a possibility that prices could soften by year-end. Here are three factors that could potentially contribute to declining home prices.

The tough buyer’s market worsened due to high mortgage rates, exceeding 8% for 30-year fixed-rate mortgages as of October 27. A Federal Reserve rate hike in the coming year may further raise mortgage rates, potentially leading to lower home prices.

Cities with the most unpaid mortgages
Credit: Chamber of Commerce

While a few rate cuts are expected in 2024, this outlook may change, particularly if inflation reemerges as a concern. The Federal Reserve initiated interest rate hikes in 2022 in response to rising inflation. In September 2023, the inflation rate stood at 3.7%, an improvement from the peak of the inflationary period but still above the 2% target. If inflation worsens, a rate hike could be on the horizon.

Although mortgage rates and housing prices don’t always exhibit a direct correlation, higher mortgage rates often discourage potential homebuyers. As per basic economic principles, reduced demand can lead to lower prices, so an increase in mortgage rates could potentially benefit some homeowners.

Where Will There Be a U.S. House Price Crash?

With mortgage rates hitting a 21-year high, prospective homeowners face a significant and extended financial commitment when purchasing their homes.

On average, it takes 30 years to pay off a mortgage, and a significant 61.3% of homeowners nationwide are still in debt. But which cities have the highest percentage of homeowners carrying unpaid mortgages?

Chamber of Commerce  conducted an in-depth analysis of housing data from 170 of the most populous cities in the U.S.. Their analysis specifically focused on determining the percentage of homeowners with mortgages and those without.

California, renowned for its highest median monthly housing costs in the nation, features prominently among cities with the most unpaid mortgages. Of the top 50 cities in this category, 18 are in California. Among those in the Los Angeles metropolitan area are Fontana, Moreno Valley, Riverside, Corona, Ontario, Santa Clarita, Palmdale, Rancho Cucamonga, and Los Angeles.

Cities with the most paid-off mortgages
Credit: Chamber of Commerce

Fontana, California tops the list with a remarkable 82.5% of homeowners still carrying mortgages. Just less than one in five is without mortgage debt. This aligns with the city’s high monthly housing costs at $2,236, a significant 34% above the national average.

Additionally, over a third of Fontana homeowners allocate over 30% of their income to housing expenses. This figure surpasses the national average of 27.4%.

San Francisco High Costs

Outside of California, San Francisco ranks as the city with the highest housing costs. The median monthly cost of homeownership in San Francisco is nearly $4,000 ($3,964). Here, over two-thirds of homeowners are still carrying mortgage balances.

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Elsewhere, the rapidly growing Phoenix suburb of Gilbert, Arizona, claims the second spot, with 79.2% of homeowners bearing mortgages. Additionally, the Phoenix suburb of Chandler ranks 7th, with 77% of its homeowners continuing to make monthly mortgage payments.

Both cities have relatively new homeowners; Gilbert with a median housing tenure of 6 years and Chandler at 8 years. On average, it takes 30 years to pay off a mortgage. So, these residents have a long journey to debt-free homeownership.

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