• Experts expect home prices to decline between 0-9%.
  • With low inventory and homebuilder sentiment, supply is too low to meet buyer demand.
  • Demand will increase more as more Millennials and Gen Z-ers enter the market. 
  • Two major differences from the 2008 market: strict lending standards and low foreclosure activity. 

With mortgage rates hovering around 7% and a strong likelihood of recession around the corner, buyers and homeowners are asking, “Will the market crash?” 

Housing economists have been quick to offer some clarity on the situation. Overall, they agree home prices could fall, but the decline won’t be as steep as experienced during the Great Recession—for (at least) five compelling reasons. 

Before we get to those reasons, let’s talk about home price forecasts. 

Experts forecast single-digit declines in home prices

Housing economists weighed in on the potential for steep nationwide declines in home prices. While there isn’t a clear consensus, expert predictions top out at price declines in the single digits. 

Most markets are going to experience price declines in the high single digits.

Robert Dietz

Chief Economist for the National Association of Home Builders (NAHB)

While price declines of 8 or 9% may cause some economic pain, it pales compared to the collapse in home prices during the Great Recession, when some markets saw prices drop by 50%. 

Rick Sharga, Executive VP of market intelligence at ATTOM Data Solutions, sees home price declines as “almost inevitable” but expects them to be around 5% rather than 8-9%. 

NAR Chief Economist Lawrence Yun sees high-priced markets like California as most vulnerable to an economic downturn. He does not expect the Midwest to see a decline in housing prices. 

Overall, Yun expects national home prices to remain flat in 2023. 

The majority of housing experts do not expect a crash

While some decline in home prices seems inevitable, the majority of housing experts do not expect a crash. Nor do they expect the decline in buyer demand to pose a significant threat to the overall economy. 

For one, we still have more buyers than available properties, which is the exact opposite of what happened in the 2000s. 

Federal Reserve Chair Jerome Powell has even said the U.S. is not in a recession—though it seems likely in the near future. 

I do not think the U.S. is currently in a recession, and the reason is there are too many areas of the economy that are performing too well.

Jerome Powell

Federal Reserve Chairman

Housing experts who don’t expect a crash point to the following five reasons:

  1. Low Inventory
  2. Under-investment in new construction
  3. New buyers
  4. Stricter lending standards
  5. Low foreclosure activity

#1 – Inventory is still very low

The National Association of REALTORS® has credited decades of underbuilding with the current shortage of housing supply. The gap between supply and buyer demand is still enormous, even with the latter cooling as mortgage rates rise and home prices remain elevated. 

As rates go up, buyers have to adjust their price point, but the supply of affordable housing is so limited that many buyers are forced to wait on the sidelines

With fewer potential buyers able to afford a home, pressure on rentals has grown, driving rents up and making it harder (if not impossible) for renters to save money for a down payment.  

We simply don’t have enough inventory. Will some markets see a price decline? Yes, [But] with the supply not being there, the repeat of a 30% price decline is highly, highly unlikely.

Lawrence Yun

Chief Economist for the National Association of REALTORS® (NAR)

#2 – New construction is too low to meet demand

Building permits have fallen for the third consecutive month, and all evidence points to a continuing lag in housing development—particularly with single-family homes. 

This is not a time for new construction to slow down. But with builders making concessions to facilitate home sales—thanks to rising mortgage rates—it’s not hard to see why homebuilder sentiment has declined for ten straight months to half its level from six months ago.

This will be the first year since 2011 to see a decline for single-family starts. And given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues. While some analysts have suggested that the housing market is now more ‘balanced,’ the truth is that the homeownership rate will decline in the quarters ahead as higher interest rates and ongoing elevated construction costs continue to price out a large number of prospective buyers.

Robert Dietz

Chief Economist for National Association of Home Builders (NAHB)

#3 – New buyers are entering the market

More Millennials and Gen Z-ers are joining the ranks of first-time buyers—who, as a group, were responsible for 30% of home sales in June 2022, up from May’s 27% and down from 31% in July 2021. 

Most first-time buyers are younger than 40. In a few years, Gen Z will reach 30 with a stronger financial footing than Millennials had at their age. Combined, the two generations represent a broad buyer pool motivated to purchase their first homes. 

That growing demand, combined with low inventory, will keep home prices from crashing. 

#4 – Lending standards are strict (compared to 2007)

Homeowners today are in a better financial position than those who secured loans in the years prior to the Great Recession.  At that time, lenders didn’t require income documentation and offered mortgages regardless of credit history or the down payment size.

“Liar loans” were fairly common back then, with borrowers claiming a larger income to qualify for mortgage agreements they couldn’t actually afford. 

Today, borrowers applying for a conventional mortgage need a minimum credit score of 620 and have to prove the sufficiency of their income. Standards are much tougher, and the typical borrower has excellent credit. 

Homeowners today also tend to have equity in their homes, which they can leverage in the purchase of a larger home as their family grows or to help with a necessary relocation. 

#5 – Foreclosure activity is low

Since the typical homeowner is in a stronger financial position—and has an equity cushion in their current home—they’re far less likely to default on their mortgage. 

While millions of foreclosures flooded the housing market in the years after the last housing crash, further depressing home prices, that outcome isn’t likely with this recession. 

Foreclosures hit record lows in 2020 because even during the height of the pandemic, lenders weren’t filing default notices. 

So, while today’s home prices are pushing the limits of affordability, homeowners, as well as buyers who can still qualify for a mortgage, are in a better position to ride out the storm. 

Top takeaways for real estate agents

The combination of inflation and higher mortgage rates has eroded consumer purchasing power and left many would-be buyers and sellers on the sidelines. But that doesn’t erase your responsibility toward your clients and community. 

A huge part of cultivating your geographic farm is educating your community on the latest news and developments impacting them, especially as it relates to buying and selling homes.

Update them regularly, making it a priority to share something of value with them at least once a week—not to pressure them into working with you, but to help them recognize worthwhile opportunities when they come.