Real estate market crash? Experts can’t agree if it’s a recession or a slowdown

  • A typical real estate cycle has four phases: expansion, hypersupply, recession, and recovery.
  • But hypersupply is missing in this current cycle, and experts can’t agree on what comes next.
  • Some say it will be a correction, while others believe a dramatic slowdown is coming.

Rising inflation and interest rates have cooled the sizzling housing market, leaving many Americans wondering what comes next.

One thing is for sure: it is a market like we have never seen before.

in a typical real estate cyclethere are four phases: expansion, hypersupply, recessionand recovery. But hypersupply is not in the equation this time, and the cycle has become a loop.

“In the typical narrative, ‘hypersupply’ is due to construction companies overbuilding and overproducing housing units,” Todd Metcalf, senior economist at Moody’s Analytics, told Insider. “This occurred during the housing bubble that preceded the Great Recession. Yet nationally, we still see a severe housing shortage.”

Metcalf said that instead of hypersupply, the real estate market is entering a “demand exhaustion.” During this phase, home prices fall due to a lack of affordability rather than a surplus of housing inventory.

“This is not because housing demand has disappeared, but because rising interest rates have made many people unable to buy a new home anymore,” he said.

In fact, the increase in costs has put a limit on the demand for housing. As buyers grapple with inflation and sky-high interest rates, there has been a decrease in bidding wars, slower home price growth and a uptick in national cancellation rate among home builders.

While Metcalf believes these signs point to buyer burnout, Chris Low, chief economist at FHN Financial, says they most likely signal a housing downturn.

“Housing is a leading indicator of the overall economy,” Low recently told MarketWatch. “I would say that housing is in a recession, and that probably means the rest of the economy is going to be in a recession soon.”

If the housing market is in a downturn, one of two things could happen: a correction or a crash. A correction would involve a gradual decline in prices to more sustainable levels, while a crash would be the result of rapid declines triggered by widespread panic among homeowners and investors.

NerdWallet analyst Holden Lewis has said the latter is unlikely to happen.

“Builders haven’t overbuilt, and lenders have strict lending standards,” he told Insider earlier this year. “Put those trends together and you have a real estate market that is unlikely to crash anytime soon.”

José Torres, senior economist at Interactive Brokers, has a less optimistic outlook.

“At this point, housing is unaffordable when considering family income and individual income,” Torres told Insider. “The percentage of average monthly payment to household income and individual income is at record levels, similar to levels we saw during the 2008 financial crisis.”

Torres said he believes this has created “a perfect storm” in the real estate market that will lead to a sharp drop in home prices. “We’re going to see something very similar to what we saw during the Great Financial Crisis” in terms of price declines, he said.

While home prices have not plummeted, the data suggest that the proportion of sellers cutting their selling prices has reached a maximum. Additionally, the portion of homes selling above list price fell for the first time since June 2020. Yet despite declining affordability, prices are rising across the country. This is why housing experts do not seem to agree with the current phase of the housing cycle.

Whichever side of the argument you find yourself on, at least one thing is clear: the real estate market is slowing down. That could mean a fix or lockout is just around the corner.

Leave a Reply

Your email address will not be published.