Will the Housing Market Crash?

Home prices were creeping up for a while, but now there are strong indications that the housing market is cooling off. Real estate site Redfin reported that in July 2022, home supply in the United States posted its first year-over-year increase since August 2019, as pending sales continued to plummet.

Reports Indicate the U.S. Housing Market Is Cooling

A recent report from the Federal National Mortgage Association,(Fannie Mae) says that homebuyer confidence fell in July 2022 to its “lowest level since 2011 and well below the all-time high set in 2019.”

According to Fannie Mae’s Home Purchase Sentiment Index, only 17% of respondents said that it’s a good time to buy a home. The percentage of consumers who think it’s a good time to sell their homes has been falling in recent months as well. In May that figure was 76%; in July, it was 67%.

The recent real estate news might cause anxious would-be homebuyers and sellers to ask a familiar question:

Will the Housing Market Crash?

Money expert Clark Howard has some strong reasons behind his assertion that the housing market is not going to crash. While he labels it as “educated guess territory,” he cites three pieces of evidence that he believes show that a collapse is not in the cards.

He notes that people’s fears about the current market harken back to the housing collapse that preceded the Great Recession in the late 2000s.

“There’s a buyers strike and it’s widespread around the country. … There’s this feeling of impending doom in a lot of people that home prices are going to repeat what happened 15 years ago. And it is not going to happen at all.”

3 Reasons Why Clark Says It’s Unlikely the Housing Market Will Crash

1. Housing Shortage Continues

“We have a shortage of housing in the United States today, not a surplus,” Clark says.

According to a recent report from housing advocacy group Up for Growth, the country is 3.8 million homes short of meeting the actual need. That means that for the foreseeable future, demand for home construction will continue to be at a premium, buoying the market.

2. (Relatively) Low Mortgage Rates

With mortgage rates hovering around 5%, you may be forgiven for thinking that what you pay for a home now has ventured into the realm of unaffordability. That’s not necessarily the case.

Clark said in a podcast this spring, “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%!”

Because mortgage rates have been so low in recent years, Clark says many homeowners find themselves locked into “ultra-low” rates that are so attractive that they don’t want to give up their homes.

As an example, Clark cites Team Clark General Manager Christa, who has a mortgage rate of just under 2% on her home. “She’s not moving!” Clark says. “Even if there was a house that she and her husband loved and they were like, ‘Wow, wouldn’t it be great to live in that house and the price, we could afford it, but we’d have to give up our 1.785%?’ Not going to happen.’”

Because many homeowners are in a similar situation, Clark says, “The inventory of homes is going to remain tight, and you’re not going to have the velocity of the move market that there normally is.”

3. Mortgage Lending Practices Are Not As Risky as They Once Were

About 15 years ago, lenders were recklessly approving mortgages to high-risk borrowers. That led to mass mortgage defaults across the nation.

Clark says mortgage lenders have shown much more discipline this time around. “Fifteen years ago, there were loans that were made no matter what,” he notes. “No down payment, nothing. No such thing happened this cycle.”

Thinking About Buying a Home Right Now? Read This

Clark says although mortgage rates are relatively low, the Federal Reserve has some work to do to regain consumer confidence, which has dipped due to inflation concerns. “For buyers, this remains a very difficult time for you at the elevated interest rates,” Clark says.

If you’re thinking about buying a home, here’s Clark’s advice: Wait it out until mortgage rates go back down, which he expects to happen as the federal government responds to inflation.

“When I think this through, I think it makes the most sense now to wait til the Federal Reserve finishes its moves with interest rates and rebuilds credibility that inflation is under control because then mortgage rates will decline,” he says.

Thinking About Renting a Place? Read This

“For renters, this is going to remain a difficult time,” Clark says. “You will have people who take homes that they have ultra-low mortgage rates on like Christa … and even if she and her husband move, they’re not going to sell that house. They’re going to turn it into a rental property.”

Because of this, Clark says renters may see more units added to the housing supply, but it may take some time for them to be able to afford to buy a home. 

Read our step-by-step guide on how to save up for a home.

Final Thoughts

Clark says the U.S. housing market is slowing down a bit, but there’s no need to worry about a total meltdown.

“Yes, we may see some softness,” he says. “We may see some price declines in a small number of markets that got really overheated, but the housing market is going to be fine.”