4 Reasons a Housing Market Crash Is Actually Unlikely, According to Harvard Researchers

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Parallels have been drawn between the housing crash of ’08 and today, but these Harvard Researchers don’t believe another crash is likely. Here’s why. 

Paying attention to housing news today is like watching a tennis match. First, one expert says the housing market is about to crash, then another volleys by declaring it will not happen. Four Harvard researchers recently sided with those who do not believe we’re about to witness another housing crash. Here’s why.

1. A healthy labor market

June ended with a historically low unemployment rate of 3.6%. The strong labor market makes potential home buyers confident in their ability to make a down payment and meet their monthly mortgage obligations.

As the Federal Reserve continues to fight inflation through higher interest rates, unemployment could rise. Even the Fed expects unemployment to rise to around 4.6% by the end of December. While that could impact home demand, the labor market has defied the odds too many times this year to be sure.

2. Low inventory

Though interest rates have risen dramatically since 2022, some home buyers are unwilling to leave the market, worried that home prices in their area will rise again. At the same time, existing homeowners are less likely to put their homes on the market, afraid they won’t be able to afford another place to live.

According to the FHFA National Mortgage Database, nearly two-thirds of current mortgages have an interest rate of less than 4%. One-quarter of all mortgages have an interest rate below 3%. Unless necessary, now is not a good time for a homeowner with a low rate to sell only to buy a new property with an interest rate twice as high as the one they left behind.

The primary difference between today and 2008 is this: In 2008, there was a surplus of homes for sale. The lack of homes on the market in 2023 continues to prop up prices.

3. Low foreclosure rate

The run-up to the 2008 financial crisis was like the Wild West of mortgage lending. Lenders often approve a mortgage for anyone with a pulse, regardless of their ability to repay the loan. When things went south, millions of foreclosures took place, and after the dust settled, Congress came up with new, strict rules for mortgage qualification.

Foreclosures were a huge contributor to the surplus of homes in the mid-2000s. With stricter mortgage qualifications, new homeowners are less likely to miss payments or end up in foreclosure. Simply put, that’s fewer homes on the market.

While it’s true that foreclosures could increase if unemployment climbs, it’s improbable the number of repossessions will approach 2008 levels.

4. A ‘floor’ of factors

According to the researchers, today cannot be compared to the mid-2000s crash. For one thing, between February 2020 and February 2023, home prices increased by a staggering 37.5%. After accounting for inflation, that’s still an eye-popping 17.5% over a relatively short period. Sure, prices fell by 3.6% between March 2022 and June 2023, but they’re still remarkably high.

The combination of a strong job market, low inventory, and qualified buyers has created a floor that holds up the entire housing market. Even if one factor weakens, the others are there to shore things up.

These are odd days in the housing market, and it will be interesting to see what happens once the Federal Reserve can loosen its hold on interest rates. Will it spur so many current homeowners to sell that inventory approaches a normal level, or will it drive prices up even further?

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