Will Home Prices Crash? What To Tell Your Clients

Just like all of us, every housing market crash is special and unique in its own way. Due to inflation and much higher interest rates, it’s easy to think that the housing market is going to crater and that prices will fall like they did in 2008. This may happen, but it is important to recognize that this is a completely different type of market than the housing bubble from 14 years ago. Though prices have dropped, it is not clear that they are going to crash as steeply as they did during the Great Recession. So, as a real estate professional, what should you tell your clients?

According to Redfin, nearly 60,000 home purchase agreements were called off in September, the most ever called off in a month (aside from the month the pandemic started). Clearly, people are rattled by rising interest rates, and other uncertainties in the economy. Sold prices, however, have not dropped to the same extent they did when the housing bubble burst in 2008. A major reason for this may be that the supply of homes for sale is extremely limited, which keeps prices higher than if the market were flooded with sellers. A “critical difference” between now and the 2008 recession is that “there just isn’t enough housing supply today,” write Philipp Carlsson-Szlezak and Paul Swartz, global chief economist and senior economist (respectively) at Boston Consulting Group.

There are many reasons for this limited supply. One factor may be potential sellers deciding to wait until the market improves to sell their homes. Another underlying problem is that the housing market has been under-supplied for years, well before the pandemic. During the 2008 crash, there was a massive supply of homes that had been built, and many more cheap homes in foreclosure. This large supply of inexpensive homes helped tank prices. After the housing bubble burst, thousands of home building tradespeople left the industry for other employment. The New York Times estimates that housing starts went from 2.1 million in 2005 to 554,000 in 2009, a massive decrease. Since homebuilding is extremely labor intensive, time-consuming, and takes significant training, 14 years has not been long enough to attract thousands of highly trained home builders back into the industry. The pandemic helped erase any progress that had been made in construction, further limiting the supply of available homes.

Though 60,000 people called off purchase agreements last month nationally, housing supply is becoming increasingly more limited. In Oregon, there are almost 20% fewer homes on the market than there were just before the pandemic. This limited supply has a complex effect on home prices, and may be keeping prices higher than they otherwise would be.

It is impossible to predict where home prices will go in the longer term. However, in the real estate industry, talk of recession and a major market correction have convinced many potential buyers and sellers that home prices are about to drop dramatically. It is important to explain to clients that, though we are likely entering a recession, home prices may not crash to the extent that many people feel they will. Thus, it may not be a winning strategy to wait out the market in the near-term.

Though not much is clear about where the market is headed, it is clear that the under-supply of homes (and nervous buyers and sellers) have slowed the real estate business down significantly. When there are fewer buyers and sellers, the real estate industry suffers.

There is no way of knowing with certainty where the market is headed, but if you can explain to your clients the factors that are putting both upward and downward pressure on home prices, you can help manage their expectations, and give them a more realistic impression of what they will encounter in this complex housing market.