Real Estate
Experts say housing market crash unlikely due to 2.3-6.5 million unit shortage and 6.5% price increase.
Despite widespread speculation and hope among Americans for a housing market crash, economists suggest that such an event is unlikely in the near future. According to a recent report by Business Insider, 44 percent of Americans believe a market crash could occur this year, with a third of those respondents hoping for it to make housing more affordable. However, experts like Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), argue that the current supply-demand dynamics make a crash improbable. The U.S. is currently short between 2.3 million to 6.5 million housing units, a shortage that fundamentally supports high home prices.
The primary reason for the improbability of a housing market crash lies in the basic economics of supply and demand. As Yun points out, the shortage of housing units means that prices cannot crash. This sentiment is echoed by Greg McBride, Chief Financial Analyst for Bankrate, who notes that the fundamental reason for the run-up in prices is heightened demand coupled with a lack of supply. The S&P CoreLogic Case-Shiller Home Price Index reported a 6.5 percent year-over-year increase in home prices as of March, further illustrating the persistent upward pressure on prices due to limited inventory.
Reflecting on the housing market crash 15 years ago, it is clear that today's conditions are markedly different. The previous crash was driven by an oversupply of homes and lax lending standards, leading to the Great Recession. In contrast, today's market is characterized by tight inventory and stringent lending practices. According to Bankrate, the median credit score for new mortgage borrowers in the first quarter of 2024 was an impressive 770. Additionally, the NAR reports that the current housing market has only a 3.5-month supply of inventory, well below the 5-6 months needed for a balanced market.
While some experts speculate about the possibility of a housing bubble, the consensus is that a crash is unlikely. Mark Fleming, Chief Economist at First American Financial Corporation, emphasizes that the imbalance between the number of buyers and available housing inventory makes a significant price decline improbable. Dave Liniger, founder of RE/MAX, suggests that any meaningful drop in mortgage rates could lead to a surge in demand, further driving up prices. This view is supported by Skylar Olsen, Chief Economist at Zillow, who predicts that home prices will continue to rise in 2024.
"[There’s] just simply not enough supply. So the economics of supply and demand, if there’s a shortage, prices simply cannot crash."