Will the Housing Market Crash?

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Although real estate prices have been red-hot over the past couple of years, there are some indications that the market may be softening a bit.

Home sellers dropped their prices on 12% of properties up for sale during the month-long period ending April 3, 2022, according to online real estate brokerage Redfin, as compared to only 9% for the same period a year ago. But by no means does that mean we’re in anything close to a buyer’s market.

Houses Prices: Up, Up and Up

The March 2022 national median home listing price was $405,000, up 13.5% compared to last year, according to Realtor.com; that figure is a 26.5% hike from March 2020.

“The numbers are shocking how much home prices have gone up in the last couple of years,” money expert Clark Howard says.

If you’re thinking about buying a home, Clark has some advice on how to navigate this crazy real estate market. He says it all depends on how long you plan on owning the home. (He also points out that, if you’re not comfortable with the market’s inflated prices, you can always rent until things get better.)

In this article, I’ll start with information on why prices are so high, then get into whether the market is headed for a crash, and finally, whether you should buy a home right now or not.

Why Are Housing Prices So High?

U.S. real estate prices continue to be sky-high for three main reasons:

  • The COVID-19 pandemic
  • Low supply and high demand 
  • (Relatively) low mortgage rates

Let’s go into detail a little bit about each of these three factors.

The COVID-19 Pandemic

More than two years after the pandemic began, its effects can still be felt in several important economic sectors including housing.

The up-and-down price of lumber, which started at the onset of the pandemic, continues to tack thousands of dollars onto the cost of building a home. And prices for building materials in general are up 20.3% compared to last year and 28.7% since January 2020, according to the National Association of Home Builders.

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In addition, a shortage of workers, exacerbated by the lack of training programs during the pandemic, has the construction industry playing catch-up when it comes to homebuilding.

The pandemic also led to more people working remotely, which allowed them to migrate from crowded cities to suburban areas and places that are less costly to live. This created housing demand in sparsely populated areas across the nation, as this Forbes article details.

Low Supply and High Demand

When it comes to the supply of homes, a 2021 report from Freddie Mac estimated that America, at that time, was short 3.8 million units, a 52% increase from 2018 to 2020.

The report also pointed out that the homeownership rate for 25-34-year-olds had been rising steadily since 2016, pushing demand through the proverbial roof.

(Relatively) Low Mortgage Rates

Another factor that has kept housing prices high is attractive mortgage rates. 

At 5%, mortgage rates are higher than they have been for many years, but they’re still relatively low, according to Clark.

“By historical numbers, it’s hard to get your head around it because we all think in terms of the era we came of age, but 5% is like ridiculously low based on historical averages,” he says. “I remember when mortgage rates were 20%!”

Will the Housing Market Crash?

Clark says you can rest assured that the conditions that created the housing boom and bust in the 2000s are not the same as what’s happening today.

“We are not going to see any kind of wholesale collapse in housing prices like we had in the aftermath of the banking scandals, because then we had a surplus of housing units in the United States,” he says. “Today we still have a shortage of millions of units, so don’t fret about that.”

Although there’s no imminent crash on the horizon, Clark says inflated prices in the housing market are having a negative impact on many prospective buyers.

“I’m seeing a lot of stories about how first-time homebuyers have thrown up their hands and given up,” he says. “They’ve left the market for now.”

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Should You Buy a House Right Now?

As to whether or not you should buy a home right now, Clark says it depends on how you answer this question: Is your homeownership cycle long-term or short-term?

“If you can buy a home today that you feel you’ll still be comfortable owning in the year 2032, then there’s a real possible advantage to going ahead and buying,” he says.

On the other hand, if you’re considering buying a home that you’ll keep for just a few years, Clark is not in favor of it.

“The way prices are right now, I don’t want you to buy a home as a short ownership cycle buyer,” he says.

What Type of Homeowner Are You?

Clark says it’s understandable that the recent hike in mortgage rates could scare off some homebuyers but you do have options. His advice depends on your housing plans for the future:

  • Long-Term Homeowner: If you can afford the payment, and you’re willing to be an owner of that property for a long time, then buying a home can work out for you.
  • Short-Term Homeowner: “Someone buying something for a short cycle? That’s what I wouldn’t do right now,” Clark says.
  • Uncomfortable With the Market: “In a very difficult market, you do have the choice of staying on the sidelines and waiting for inventories to build and prices to moderate, but again, prices aren’t going to collapse,” he says.

Want more real estate insights from Clark? Here’s how to calculate how much home you can afford.

What are your thoughts on the housing market? Let us know in our Clark.com community!

More Housing Resources From Clark.com:

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