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Is a Housing Market Crash Inevitable?

  • Susan Solliday
  • 06/24/23

It probably wouldn’t surprise you if I said that 78% of Americans expect a housing market crash. It might raise an eyebrow if I said a whopping 63% of those surveyed by Consumer Reports WANT the crash.

So that begs the question, who would be the most affected by a downturn in the housing market and, conversely, who would be the beneficiary?

Biggest Loser

Sadly, those who need to sell and those who do not wish to buy again will likely suffer the most significant loss. Particularly, retirees moving from ownership to retirement rentals during a market downturn will face a plunge in property value and loss of home equity. Thus, they would receive far less than anticipated when cashing out, potentially requiring them to adjust to a more modest lifestyle.

Ultimate Beneficiary

Those with a higher net worth will reap the rewards of a market decline through decreased costs. Nevertheless, the greatest victors of such a collapse are Generation Z members, born between 1997 and 2012. This group has mainly been renting or living at home and has had the time and ability to save up for a down payment. Even though their savings are slightly lower than their predecessors at $15,601 on average, due to higher living costs and more expensive rents, they will likely have refinancing options in the future. All in all, Gen Z stands to gain much and lose nothing from a market collapse. They evidently are aware of this, seeing as 84% are the most enthusiastic group for a crash. It makes one wonder if they understand the long-term ramifications: Mom and Dad moving in with them!

Understanding the Real Estate Market

A market collapse would include steeply falling property values and sales activity in the real estate market, leading to lower sale prices, weaker demand, and a surge in foreclosures. Recent developments, such as skyrocketing house prices, rising mortgage rates, the highest inflation in 40 years, and rising rents, do indicate a situation that could quickly result in such a collapse.

But Should We Be Worried?

No, not in the foreseeable future as prices have cooled, but competition is smokin’ hot.

  1. Low Property Inventories: The ARMLS reports a 2.28-month supply of homes for sale in May, still far below a comfortable 4-6 months, but up from last year’s tiny supply of 1.21 months. This shortage of homes for sale is why prices keep rising even though statistically there are fewer buyers. The supply-and-demand imbalance, with no immediate remedy, is why we don’t anticipate a substantial drop in values any time soon.
  2. Builders Aren’t Meeting Demand: The production of new homes saw a dramatic decrease after the last crash, and for many reasons, never reached the heights of the pre-2007 frenzy. This is due to shortages of materials and labor and the complexity of obtaining land, water, and regulatory approvals, making it virtually impossible to satisfy the increasing demand rapidly. A combination of both newly built homes and existing resales are necessary to correct this unbalanced market. However, this cannot be done within a short period, especially since Arizona is now one of the hottest places in the nation due to its popularity among retirees, jobs, and tax rates. The population is growing at a rate of 258 people per day.
  3. Demographic Titans Vying for Inventory: Amidst the pandemic, many people took time to reflect on their lifestyles, resulting in a surge of housing transitions. Job shifts and escalating property values, caused a reshaping of generational house-buying practices, with Boomers bypassing downsizing and retirement facilities and Millennials turning to the suburbs for the first time. Boomers, possessing ample equity and more spending power, drove the bulk of the cash deals and were often the catalyst behind bidding wars. Conversely, Millennials, who constitute the greatest portion of the homebuying population, experienced difficulties with financial limits, inflated prices, and insufficient inventory.
  4. Strict Lending Standards: To tackle inflation, the Federal Reserve raised interest rates, causing many homeowners to stay put, resulting in the housing market being brought to an abrupt standstill until early 2023. The high cost of housing has made it financially unviable for many, and standards for borrowing are demanding. According to the Federal Reserve Bank of New York, the median credit score for a loan is 765, and the increased rates are especially punishing for buyers with less money saved up, as they must make smaller down payments. The situation slightly cooled the market, however, not enough to stifle demand and drive down prices. Thankfully, barring the lending requirements becoming less rigorous and a sudden rise in the market due to artificial demand, there are no indications of an impending crash.
  5. Muted Foreclosure Activity: After the housing crisis of 2008, millions of families were pushed into foreclosure, short sales, or forced to return their homes to the bank. This subsequently caused home values to sink. However, most homeowners have established an adequate equity cushion that allows them to put their homes up for sale confidently. The Mortgage Bankers Association reported that mortgage delinquency has fallen to the lowest rate since 1979.

In conclusion, we are facing a need for more available homes to sell with no immediate solution. As homes hit the market, they are quickly snatched up. Though existing conditions are pushing the limits of affordability, there are no indications of an imminent collapse in the residential housing market.



Quarterly Report on Household Debt and Credit: 2023 Q1, Federal Reserve Bank of New York
Arizona is a Top Five State for Year-Over-Year Population Increase, AZ School of Real Estate
Mortgage Application Activity Records on Uptick
Guess How Many of us Hope for a Housing Crash


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