A housing market crash occurs when home prices plummet due to a lack of demand or an oversupply of housing. Housing market crashes can occur for a variety of reasons, including a severe recession or depression that causes homeowners to lose their jobs, high mortgage interest rates that make homes unaffordable, or an oversupply of homes that buyers don’t want or can’t afford.
During the last housing market crash, home prices fell more than 15% in 2008 compared to 2007, according to the S&P/Case-Shiller Home Price Index.
learn more: Is now a good time to buy a house?
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When will the housing market collapse?
There are no signs that the U.S. housing market is about to collapse. In fact, the economic outlook and expectations are bright for the national real estate market in 2024. A housing market collapse occurs when demand drops dramatically and home prices fall.
“We expect the housing market to continue to recover from its 2023 lows unless the unemployment rate rises significantly, which is not currently the case,” Thelma Hepp, chief economist at real estate data analytics firm CoreLogic, said in an email.
Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors, agreed there are no signs a housing market collapse is imminent.
“We continue to see a housing shortage and job creation,” Yoon said in an email. “It would be worrying if we were heading into a recession of oversupply and job cuts, but that is not the case right now.”
read more: Why are home prices so high?
According to a Washington Post analysis, home prices have risen 54% since 2019, leading some economists to worry about a possible housing bubble bursting. But while home prices continue to rise, the pace of growth has slowed. Hepp predicts home prices will rise about 3% in 2025, after rising 5% in 2024. In April 2022, CoreLogic reported that prices were up 20.1% compared to April 2021.
Zillow’s May Home Price and Home Sales Forecast predicts that home prices will fall in 2024, but the decline will be just 1.4% nationwide.
“This is a healthy sign that the market is becoming more balanced,” Orphée Divongay, senior economist at Zillow, said in an email. “With low mortgage costs, record levels of home equity, rising financial assets and a tight labor market, few people are facing mortgage delinquencies and being forced to abandon their homes.”
Hepp predicted home sales will likely increase as lower mortgage rates are expected and the number of existing homes on the market increases.
“Current economic forecasts for 2025 are also favorable, pointing to a bright outlook for the housing market,” Hepp said.
Learn more: When will house prices fall?
The housing market collapse: supply and demand dynamics
Sluggish home sales have some thinking the housing market will collapse again, said Rick Sharga, founder and CEO of CJ Patrick, a market intelligence and consulting company for real estate and mortgage companies. About 4 million existing homes will be sold in 2023, the lowest number of home sales in the past 25 years. Sales will likely remain fairly slow through the remainder of 2024 and into early 2025, Sharga said.
“However, this does not mean that current homeowners will rush to sell their homes at 20-30% discounts, as many doomsayers are predicting,” Sharga said in an email. “Demographic demand will continue: the country has more young people aged 25-34 than ever before. While demand has weakened somewhat, it still exceeds supply, and home prices continue to rise despite today’s higher mortgage rates.”
While the inventory of homes for sale is up more than 30% from a year ago, it’s still only about three months’ worth of homes, about half the market’s level in 2019, Shalga said.
“In a normal market with a balanced mix of buyers and sellers, there would be a six-month supply of homes,” Sharga said. “In the years before the housing bubble burst, there was nearly a 13-month oversupply of homes for sale.”
Lessons from today’s housing crisis
The housing market crash that began in 2007 and contributed to the global financial crisis continues to weigh on the minds of many economists and consumers, but the factors that caused that crash no longer exist.
“Literally everything about today’s housing market dynamics is different than the conditions that led to the housing crisis,” Shalga said, including limited housing supply, high levels of home equity, a strong economy and strict guidelines that mortgage borrowers must meet.
“There are very few risky subprime mortgages out there right now,” Yoon said, “so a mortgage collapse is not likely. Plus, most homeowners have low-interest fixed-rate mortgages.”
Hepp said lending standards are much tighter now. Plus, with homeowners refinancing into lower-interest mortgages and soaring home prices, most households have much more home equity than they did in 2007. Average loan-to-value ratios are much lower now than they were during the housing crisis, she said.
In 2007, homeowners who struggled to make monthly payments generally didn’t have much equity in their homes, Devongee said.
“When their homes weren’t selling, they couldn’t lower their asking price to get their homes sold,” Divongie said, “and as a result, a lot of people ended up giving up their homes.”
In contrast, today, home sellers have plenty of home equity and can afford to reduce the selling price if they need to sell.
“Unemployment is low at 4 percent,” Devongy said. “Home equity remains near record highs in most housing markets. With pandemic mortgage rates at record lows, most homeowners have extremely low monthly payments. As a result, mortgage delinquencies and distressed sales remain low.”
learn more: When will mortgage rates fall? Looking ahead to 2024 and 2025.
Signs of a housing market collapse
Whether you’re keeping an eye on the value of your home or want to buy a new one, you may want to watch out for signs of a future housing market crash. Yun said an economic shock such as a major stock market crash or large-scale job cuts over a long period of time, along with a large increase in housing supply, could signal the beginning of a housing market crash.
Hepp said that if unemployment spikes and homeowners have difficulty making their mortgage payments, they may not be able to sell their homes and may lose them to foreclosure. A significant increase in foreclosures could lead to a drop in home prices and a collapse of the housing market.
“The concern in some markets right now is the significant increase in non-mortgage expenses, such as property insurance and taxes,” Hepp said. “This may be of greater concern to fixed-income households who may sell their homes if they can no longer make the payments. As a result, if a significant number of properties go on sale, this could lead to lower home prices and a weakening of the housing market. However, a collapse in home prices, especially a widespread collapse, seems unlikely because the housing shortage outweighs the impact of these additional expenses.”
Shalga suggests consumers should keep an eye on local market conditions such as wages, home sales and home prices, as well as whether the population and job market is growing or shrinking.
“A national housing market collapse remains highly unlikely, but every market is unique and some markets will likely see prices fall even as national numbers rise – perhaps not enough to warrant a ‘collapse,’ but enough to affect some homeowners,” Sharga said.
What the housing market collapse means for home buyers
More than a third of consumers (35%) believe the housing price crash will make it easier to buy a home, according to a Lending Tree survey.
A housing market crash usually means that there is an oversupply of homes on the market and sales prices have plummeted. However, housing market crashes are often accompanied by a recession and job losses, making it harder to qualify for a home purchase. Also, homeowners may not want to sell during a market downturn.
Still, some buyers are hopeful the real estate market will change, with the possibility of less competition for homes and lower mortgage rates following the financial crisis.
What the housing market crash means for sellers
If the housing market crashes, homeowners who don’t need to sell may prefer to wait until home prices start to recover. As many experienced during the last housing market crash, being behind on your mortgage payments — meaning your mortgage balance is greater than your home is worth — won’t have an immediate impact on your finances unless you plan to borrow against your home equity.
The bigger impact will be on home sellers, who will likely be forced to lower prices as buyers look for deals.
How to Prepare for a Housing Market Collapse
If you’re worried the housing market will collapse again, here are some steps you can take to protect your financial health.
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Have an emergency savings fund that can cover at least three to six months of expenses.
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Reduce your debt, especially high-interest credit card debt.
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Make as large a down payment as you can afford and secure equity in your home right away.
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Buy a home that you can comfortably afford.
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If possible, make additional payments on your mortgage balance to build up your equity.
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When you choose a fixed-rate mortgage, your principal and interest will remain the same for many years.
Learn more: How much home can you afford? Use Yahoo Finance’s Home Affordability Calculator.
Frequently asked questions about the housing market collapse
Is 2024 a good time to buy a home?
The right time to buy a home depends on your personal situation, including job stability and your attachment to a region or city. But rising home prices and mortgage rates are making it difficult for many buyers to buy a home in 2024. Additionally, with demand for homes outstripping supply, sellers still have the advantage in most markets.
How do we know if the housing market is going to collapse?
There are many indicators to watch to see if the housing market will collapse again. A drop in demand due to unemployment or a recession, a sudden increase in housing supply, or even a major economic downturn could signal a drop in home prices.
Will housing become affordable again soon?
The Mortgage Bankers Association predicts that mortgage rates will fall to about 6.6% by the end of 2024, slightly improving the cost of borrowing to buy a home. However, overall home affordability will remain a challenge, as home prices are expected to continue to rise.
This article Laura Grace Tarpley
