Housing market crash? Experts can not agree on whether the stagnation or slowdown

  • A typical real estate cycle consists of four phases: expansion, oversupply, stagnation, and recovery.
  • But the lack of supply is missing from this current cycle, and experts can’t agree on what happens next.
  • Some say it will be a correction, while others believe there is a dramatic slowdown in store.

Rising inflation and interest rates have calmed a fiery housing market, and many Americans are wondering what will happen next.

One thing is for sure: it’s a market we’ve never seen before.

In a typical real estate cycle, there are four phases: expansion, oversupply, stagnation, and recovery. But the lack of show is missing from the equation this time around — and he threw the course into an episode.

“In the typical narrative, the ‘oversupply’ is because builders are overbuilding and there is an overabundance of housing,” Todd Metcalfe, chief economist at Moody’s Analytics, told Insider. “This happened during the housing bubble that preceded the Great Recession. However, at the national level, we continue to see severe housing shortages.”

Instead of oversupply, Metcalfe said, the housing market is entering “demand exhaustion.” During this stage, housing prices fall due to a lack of affordability rather than an excess of housing stock.

“This is not happening because the demand for housing has faded but because the rising interest rates have made it difficult for many people to buy a new home,” he said.

In fact, rising costs have curbed the demand for housing. As buyers grapple with rising inflation and interest rates, there has been a decline in bidding wars, slower house price growth, and Slight increase in the national cancellation rate among home builders.

While Metcalf believes these signs point to a buyer depletion, Chris Low, chief economist at FHN Financial, says they likely indicate housing stagnation instead.

“Housing is a leading indicator of the broad economy,” Low recently told MarketWatch. “I would say housing is in the doldrums, which probably means the rest of the economy will soon be in a recession.”

If the real estate market is in a recession, then one of two things could happen: a correction or a crash. A correction may entail a gradual decline in prices to more sustainable levels, while a crash may result from rapid declines caused by widespread panic from homeowners and investors.

The latter is unlikely to happen, said Holden Lewis, an analyst at NerdWallet.

“Builders haven’t overpaid, and lenders have strict lending standards in place,” he told Insider earlier this year. “Put these trends together, and you have a housing market that is not likely to collapse any time soon.”

Jose Torres, chief economist at Interactive Brokers, has a less than rosy outlook.

“At this point, housing is not accessible when considering household income and individual income,” Torres told Insider. “The percentage of median monthly payment of household income and individual income are at record levels – similar to levels seen during the 2008 financial crisis.”

Torres said he believes this has created a “perfect storm” in the property market that will lead to a sharp decline in home prices. “We will see something very similar to what we saw during the Great Financial Crisis” in terms of lower prices, he said.

While home prices have not fallen, the data shows that the share of sellers who have lowered their asking prices has reached a high level. In addition, the portion of homes sold has fallen above list price for the first time since June 2020. However, despite the decline in affordability, prices are rising across the country. That’s why housing experts don’t seem to agree on the current stage of the real estate cycle.

Whichever side of the argument you’re talking about, at least one thing is clear: the housing market is slowing. That could mean a correction or a crash is around the corner.

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