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- Most experts say the housing market isn't going to collapse anytime soon.
- The last housing market crash created today's supply shortage, which is preventing prices from falling.
- However, mortgage rates are expected to fall this year, making homeownership more affordable.
With mortgage rates soaring and home prices rising even higher, hopeful homebuyers are feeling a lot bleaker: Fannie Mae's latest national housing survey found that only 20% of consumers believe it's a good time to buy a home.
Home prices rose 6.49% year over year in March 2024, according to the latest S&P CoreLogic Case-Shiller Home Price Index, and many housing market forecasters expect home prices to continue to rise throughout 2024.
“It's going to be a little bit of bad news for potential buyers who are on the sidelines,” Lawrence Yun, chief economist for the National Association of Realtors, said of the housing market this year. In 2024, homebuyers will see more competition and multiple buyers, which will drive prices up even further, he said.
The tough housing market has many prospective buyers wondering whether home prices will ever fall or if there might be a crash in the near future. Some are even hoping for a housing market crash.
According to a LendingTree survey, 44% of Americans believe the housing market could collapse this year, and more than a third say they would like to see the housing market collapse because they believe it's the only way they'll be able to buy a home.
Could the housing market collapse anytime soon, and if so, will homes become more affordable for first-time home buyers?
Will the housing market collapse in 2024?
While many Americans believe there is a risk of a housing market collapse, the majority of economists who study the state of the housing market don't expect a collapse to occur after 2024.
The leading industry group's latest housing market forecast for 2024 predicts that home prices will rise between 2% and 4.8% this year.
Understanding housing market trends
Why are economists so confident that house prices won't crash?
“[There’s] “There's just not enough supply,” Yoon said. “In supply and demand economics, a shortage shouldn't cause prices to crash.”
According to Realtor.com, the U.S. is currently short of a healthy housing supply by between 2.3 million and 6.5 million homes, so even if something were to happen that caused many homebuyers to exit the market, demand likely wouldn't drop enough to significantly depress prices.
Current state of the housing market
Some would-be homebuyers may be understandably convinced that their only chance of buying a home is a housing market crash, but they may not realize that part of what got them into this situation in the first place was the last crash.
How the last housing market collapse created the situation we're in today
In the mid-2000s, many lenders were offering mortgages to high-risk borrowers without requiring proper documentation, while at the same time homebuilders were rapidly constructing new homes to meet growing demand.
“Homebuilders were building so many homes left and right,” Yoon said. “That was the hottest supply situation, so there was an oversupply.”
When the housing market collapsed and we hit the Great Recession, the homebuilding industry was devastated. Many companies went out of business and many builders moved to other industries.
In the years following the recession, the housing industry struggled to recover, and as a result, very few homes were built. Even now, more than a decade after the end of the Great Recession, homebuyers are still feeling the effects of the last downturn.
Predicting the housing market collapse
Housing market crashes usually occur when supply and demand become imbalanced, but there are many factors that can cause this imbalance, making crashes difficult to predict.
Falling demand leads to housing market collapse
A sudden drop in demand for homebuying can lead to a housing market crash. This can happen if many would-be buyers lose their jobs during a recession and can no longer afford to buy homes. If no one is buying homes, home prices will plummet.
A drop in demand also typically occurs when mortgage rates are high. This alone is often not enough to cause a price crash. But if supply is also relatively high, a moderate drop in demand can cause home prices to fall.
How Increased Supply Causes a Housing Market Collapse
Although it may be hard to imagine in the current market, it is possible for there to be an oversupply of housing. This can happen if builders build too many homes in a particular area, or if a downturn causes many owners to lose their homes to foreclosure. Not only will this scenario result in a lot of new homes being released onto the market, but the economy may also prevent other buyers from purchasing those homes.
A change in supply or demand does not necessarily mean a crash is imminent: prices may remain stable or even fall slightly without a crash.
What the housing market collapse means for home buyers
Anything could happen. No one has a crystal ball that can reliably predict what will happen in the housing market in the coming months and years. If the market crashes, will it become easier to buy a home?
It's possible, but it depends on what causes the crash in the first place. If a lot of workers lose their jobs, as happened in the last crash, it will be impossible for many home buyers to take advantage of the drop in home prices. Also, given the current supply situation, it's very unlikely that prices will fall that much without a larger economic impact.
Preparing for a possible housing market collapse
There is probably no need to prepare for a housing market collapse at this point.
But if you're wondering what you can do now to prepare for a crash in the future, here are some ways to prepare:
How to buy a home in a tough market
Instead of hoping for prices to drop, there are some things you can do to make your homeownership dreams come true in 2024.
Expand your search
If you can't afford a home in your current city, consider looking elsewhere. Talk to a local real estate agent to see if you can find a more affordable home a few towns away. Average home prices often vary significantly by zip code. Before moving to a new area, consider other factors, such as commute time and whether you want to live in a particular school district.
If you live in an expensive metropolitan area, moving outside the city could make homeownership significantly more affordable.
“For those who can afford to travel to the suburbs, exurbs or even to smaller towns in neighboring counties, rents will be more affordable,” Yoon said.
Wait for mortgage rates to fall
The only good news for homebuyers is that mortgage rates are expected to decline in the second half of 2024. While Yoon says a return to the historically low rates that borrowers enjoyed in 2020 and 2021 is unlikely, the latest forecast suggests that 30-year fixed rates could gradually decline over the next few years.
Lower mortgage rates mean more people can afford to buy a home, and lower interest rates could save you hundreds of dollars each month on your mortgage payment.
Get all the help you can
Mortgage lenders are increasingly offering incentives to attract prospective borrowers, and many of the best mortgage lenders for first-time homebuyers offer perks like down payment assistance and interest rate reductions to help borrowers purchase a home.
Be sure to take advantage of all the help available to you. Look for no-down-payment mortgages or down payment subsidies offered by lenders, as well as down payment assistance offered by your state or local government.
Frequently asked questions about the housing market collapse
A sudden drop in demand for homebuying or an oversupply of homes can cause a housing market crash. Rising mortgage rates, increased construction of new homes, and a recession can all lead to a housing market crash. However, these things do not necessarily guarantee a crash.
Some experts say that the real estate market operates on an 18-year cycle, meaning that a crash or recession is likely to occur roughly once every 20 years. However, this is not an absolute rule, and it is better to predict the likelihood of a crash based on factors affecting your particular market.
Governments can enact policies to avert a housing market crash, but they are not always successful because the crash may happen too suddenly for the government to respond, or because policymakers are trying to balance competing interests.
Even if a crash is predicted, it doesn't mean it's going to happen. If you're simply considering buying a home, you shouldn't think of it as an investment, but rather take the course of action that best suits your household's needs and financial situation.
If you're worried about a market crash, you can talk to a financial advisor about protecting your finances and assets, including your home.
The skyrocketing prices have sparked speculation that a housing bubble is on the way, but most experts say that's not the case: Even if demand were to suddenly fall, prices would likely not fall much because of the extreme lack of inventory.
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