Housing economists are optimistic about the stability of the real estate market, citing five key reasons that collectively indicate a housing market crash is not on the immediate horizon.
Low Inventories Driving Demand:
According to the National Association of Realtors, the supply of homes for sale in October stood at a mere 3.6 months. This figure is a significant increase from the 1.7-month supply observed in early 2022. The persistent scarcity of available homes continues to drive up prices, making it evident that the supply-and-demand dynamics currently in place are not conducive to a price crash in the near future.
Gradual Pace of Homebuilding:
Following the last market crash, homebuilders adopted a cautious approach and never fully returned to the construction levels seen before 2007. The current challenge lies in the inability to quickly acquire land and obtain regulatory approvals to meet the growing demand. While homebuilders are making concerted efforts, the risk of a repeat of the overbuilding seen 15 years ago appears low.
Demographic Trends and Diverse Demand:
A variety of factors contribute to the strong demand for homes. Existing homeowners, prompted by the pandemic, seek larger living spaces. Millennials, a substantial demographic group, are entering their prime home-buying years. Additionally, there is a growing interest in homeownership among Hispanics. These demographic trends create a diverse and robust demand for residential properties.
Maintained Stringency in Lending Standards:
Unlike the lax lending practices that contributed to the 2007 crash, today’s lending standards remain stringent. Borrowers face tough requirements, and the majority of mortgage recipients boast excellent credit scores. This commitment to strict lending practices prevents the artificial inflation of prices through loose lending, a key concern for triggering a market crash.
Limited Foreclosure Activity:
In the aftermath of the previous housing crash, millions of foreclosures flooded the market, significantly depressing prices. The current scenario contrasts sharply, with most homeowners enjoying a comfortable equity cushion in their properties. Foreclosure rates remain minimal, as lenders refrained from filing default notices during the height of the pandemic, resulting in record lows in 2020. While there has been a slight uptick in foreclosures since then, it is notably subdued compared to previous years.
In conclusion, the collective impact of these factors creates a consensus among experts that, while home prices are pushing affordability limits, the current real estate boom is not expected to end in a bust. The combination of low inventories, cautious building practices, demographic shifts, strict lending standards, and limited foreclosure activity suggests a more stable and sustainable housing market outlook.
