How the Housing Market Is Reverse Crashing

By: Craig Berry Reviewed By: Paul Centopani
August 29, 2023 - 4 min read

An interesting phenomenon

The U.S. housing market is experiencing an interesting phenomenon in 2023: a reverse crash.

Previously predicted to be a major cause to a pending crash, higher mortgage rates have not brought on a substantial drop in home prices.

Learn about the factors that can be attributed to this unique occurrence, the current state of the housing market, and the conflicting opinions on its future.

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Housing crash or housing boom?

In recent years, the U.S. housing market experienced a period of significant growth. Record-low mortgage rates and high demand pushed home prices to all-time highs.

However, concerns about a housing crash have started to surface. Some experts are sounding the alarm that the real estate sector may be on the verge of repeating 2008. Many mixed opinions permeate the industry for what comes next.

Some housing analysts anticipate a housing boom reversal that could mean a full-on crash. Others predict a more balanced market with single-digit annual appreciation.

In June, Fannie Mae revised its previous predictions about the remainder of 2023. In its recast, Fannie estimated prices would decline by 1.2% during 2023, an improvement over its forecasted 4.2% drop from February. The revised outlook also anticipated housing prices will decline by 2.2% in 2024.

Zillow also amended their expectations on where home values will wind up by the end of 2023. Previously, Zillow forecasted home values would rise 3.9%, but anticipates a 5% gain as of June 2023.

On the other hand, Goldman Sachs predicts a 5% dip in 2023 home values. According to the company, no substantial recovery can occur until mortgage rates start their downward journey.

How mortgage rates are influencing sellers

The number of homeowners with low rates resulted in an interesting trend.

Many would-be sellers are opting to stay put rather than list their home for sale to avoid taking on a much higher mortgage rate when they purchase their next house.

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According to Redfin, 9 out of 10 homeowners in the U.S. have an interest rate below 6%.

  • Below 6%: 91.8% of U.S. mortgaged homeowners have a rate below 6%, down from a record high of 92.9% in the second quarter of 2022.
  • Below 5%: 82.4% have a rate below 5%. That’s down from a peak of 85.7% in the first quarter of 2022.
  • Below 4%: 62% have a rate below 4%, also down from a record high of 65.3% in the first quarter of 2022.
  • Below 3%: 23.5% an interest rate below 3%. Again, down from the record high of 24.6% in the first quarter of 2022.

This “lock-in” effect has continued to push an already tight inventory down to record lows. According to Redfin, new listings of homes for sale, as well as the total number of listings both dropped to their lowest level on record for this time of year, fueling buyer competition in some markets and preventing home prices from falling further.

“High mortgage rates are a double whammy because they’re discouraging both buyers and sellers–and they’re discouraging sellers so much that even the buyers who are out there are having trouble finding a place to buy,” said Redfin Deputy Chief Economist Taylor Marr.

Redfin’s survey revealed approximately 27% of homeowners who are considering listing their home in the next year would feel a greater sense of urgency if rates dropped to 5% or below. Additionally, an impressive 49% of potential sellers noted they would be inclined to list their homes if rates were to dip to 4% or below.

These findings support how mortgage rates directly influence seller behavior and contribute to lower housing inventory.

Factors influencing a reverse housing crash

Housing economists identified five elements that attribute to the surprising resolve of home values.

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Still-low inventory: Homeowners with low interest rate mortgages are holding onto their homes unless current rates decline, continuing to exacerbate an already low inventory problem.

Construction challenges: Regulatory hurdles, disrupted supply chains, and higher costs are suppressing new construction, resulting in a housing supply shortage.

Demographic patterns: Representing 43% of the housing market, millennials prefer affordability, bigger homes, DIY opportunities for renovations, and cost-effective locations.

Conservative lending: Banks are more conservative with their lending practices. If lending guidelines were relaxed, the market could see a surge of buyers, pushing home prices even higher.

Fewer foreclosures: Foreclosure rates were high back in 2008 due to homeowners owing more than their home’s value. Currently, this is far less common.

Advice for homebuyers

Prospective homebuyers face tough choices in today’s market.

Although predictions imply inflated home prices may decline slightly, new home construction will continue to lag for the foreseeable future. If demand resurges, limited housing inventory could cause home prices to spike again, keeping homes unaffordable for many.

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If you’re thinking about buying a home this year, you’re in a tricky spot. While you may be tempted to wait for interest rates to drop, you could be dealing with a surge in home prices and competition if you wait too long. Although mortgage rates may not be ideal, shopping around to get multiple quotes can help you lock in a lower one compared to market averages.

If you can afford to buy right now, and your circumstances created the need to do so, then buying could be a great idea. If home prices climb, waiting to buy could mean even less affordability and missing out on building equity.

If you aren’t ready to buy a home right now, it could be a great time to get your ducks in a row.

Research the areas that may best suit your needs. Make sure your credit is up to par, and that you have an adequate amount saved for your down payment. And remember to start the preapproval process early so that when you’re ready to pull the trigger, you’re ahead of the game.

Reverse housing crash – the bottom line

The U.S. housing market is going through unique times in 2023. The demand for homes may have slowed a bit, but it’s still there.

Home prices continue to rise in many areas, even at a decelerated pace, and market indicators offer an overall positive outlook. While demand may decline and the pandemic-induced housing boom may slow down somewhat, a reverse housing crash is occurring in 2023 instead of a full-on market crash like 2008.

If you’ve decided now is the time to buy, speak with a lender about getting fully pre-approved.

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Craig Berry
Authored By: Craig Berry
The Mortgage Reports contributor
With over 20 years in mortgage banking, Craig Berry has helped thousands achieve their homeownership goals.
Paul Centopani
Reviewed By: Paul Centopani
The Mortgage Reports Editor
Paul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.