4 Signs That a Housing Market Crash Could Happen in 2023

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Four factors working together makes a crash more likely. 

Nostradamus, we are not. But when it comes to the U.S. housing market, we can look to the past to get a sense of what the future may look like. Here, we’ll examine where the housing market stands today and attempt to predict what awaits us.

Setting the stage

A look back into American history helps us identify the factors that lead to a housing market nosedive. First, there has to be a housing bubble.

And that’s where we run into some confusion. Economists are not quite sure if we’re in a true housing bubble. Here’s a list of typical characteristics of a housing bubble. You’ll notice that we can’t check every factor off the list.

Home prices rise faster than income or inflation

Home prices have increased faster than income and inflation over the past three years.

Check and check.

High mortgage rates

Rates are undoubtedly higher today than they’ve been for several years, but throughout U.S. history, an interest rate of 6% would have been considered quite fair. What makes these mortgage rates feel sky-high is the fact that housing prices have not decreased enough to make up for the higher rates.

Check — sort of.

Low availability of affordable housing

There’s a nationwide housing shortage ranging from 2 million to nearly 6 million new housing units, depending on who you ask. Based on the law of supply and demand, this shortage has kept housing prices high.

Check.

High rates of subprime mortgages and predatory lending

A subprime mortgage is designed for borrowers with a poor credit history. They’re often adjustable-rate mortgages (ARMs) that start with a low enough interest rate to allow a borrower to qualify. By the time the rate on the ARM begins to rise, the borrower is already in the home and may be struggling to pay bills.

Subprime mortgages and predatory lending were two factors that led to the housing bubble burst of 2008, and subprime borrowers were among the first to default on their mortgage loans and lose their homes.

Not currently a factor.

As anyone who’s applied for a mortgage loan lately can tell you, it’s far tougher to qualify than it once was. That’s due to laws put into place to avoid a repeat of 2008. In addition, most mortgage lenders don’t want to be left holding the bag if a homeowner defaults on their loan. ­­­­­­­­­

Four signs to look out for

Based on pre-crash signals received before other housing market crashes, these four signs indicate that another may be on the way.

1. Home prices continue to soar

While this is true in some parts of the country, prices have cooled in others. There will be a “tipping point,” a time at which prices are far higher than buyers are willing to pay.

People have watched in amazement as prices soar. Perhaps what has surprised the market most over the past few years is that we haven’t hit a tipping point just yet.

2. Mortgage interest rates continue to climb

To slow spending and settle inflation, the Federal Reserve has raised the interest rate nine times since March 2022. However, with the rate increase implemented this month, the Fed indicated that hikes might be ending. The Fed will continue to monitor the situation, but believes additional policies may need to be enacted to make borrowing more restrictive.

3. Inventory drops

When the inventory of existing homes drops, it signals two things:

Homeowners are unwilling to sell their homes because they’re afraid they won’t find another home they can afford.Serious home buyers will fight over fewer homes available on the market, further driving prices upward.Anything that pushes prices higher could be the thing that leads to the tipping point mentioned above.

4. Predatory lending rears its ugly head

Because current laws make it more difficult for predatory lenders to do business, this factor is the least likely to occur. In order for predatory lending to play the same role as in 2008, there would have to be a huge number of under-the-table deals.

Simply put, credible lenders are no longer willing to take a risk on buyers who are not creditworthy. Shady lenders face the wrath of the U.S. government for making bad loans.

What a market crash would mean for homeowners

Between 2020 and 2022, U.S. home prices increased by 30%. Elevated home prices may have shocked the housing market, but came as good news to many existing homeowners. But for the average homeowner, a housing market crash would mean little. The average homeowner can likely ride out a loss of value. Even if prices dropped by 20%, homeowners would still be 10% ahead of where they were at the beginning of the pandemic.

However, there are two groups of homeowners who could be hit hard by a market crash:

Home sellers who must move for a job, illness, or other reason. Once the market crashes, it takes time to recover. Those who sell during the big dip are the ones who walk away with the least money.Homeowners counting on a home equity loan to make major repairs or changes. By now, most property owners have enjoyed several years of rapidly climbing home values. After three years, it’s natural to believe that values will continue to increase. If a crash occurs, at least a portion of that equity disappears.

Takeaway

There’s no reason to panic sell before prices begin to drop. Unless you must move, you may want to stay put for a while, particularly if your current mortgage has a low interest rate. Even if there is a market crash, economists say there’s little reason to believe it will be anything like the 2008 crash. Here are three reasons why:

The labor market remains strong. During the last housing downturn, there were 8 million job losses in one year. While there have been layoffs in 2023, the unemployment rate is still low.There are so few loan delinquencies. During the previous bust, about 10% of all borrowers were late on their payments. Today, the rate is 3.6%.Low foreclosure rates. During the last market crash, 4.6% of all mortgaged homes went into foreclosure. Today, that rate is 0.6% — a historic low.

Don’t allow talk of a housing market crash to push you into selling before the time is right.

What a market crash would mean for home buyers

The luckiest homeowner is the one who sells their property while prices are skyrocketing and buys another when prices are dropping. In the fourth quarter of 2008 — the heart of the housing market meltdown — home prices fell by 12.4%. That means that the average house selling for $300,000 earlier in the year could be purchased for $262,800.

While a 12.4% drop does not sound dramatic, it represents the average. According to news reports at the time, some areas of the country were hit much harder. For example, in the Cape Coral-Fort Myers, Florida area, prices dropped by 50.8% for the year. In Saginaw, Michigan, prices slid by 41.4%, and in the Riverside-San Bernardino, California area, home prices took a hit of 40.8%.

For buyers, dropping prices means a greater opportunity to purchase the home they’ve been waiting for.

Takeaway

If you’re a buyer who’s been priced out of the market, there’s no guarantee of either a market crash or lower prices in your region of the country. Still, if you’re serious about buying, check with a local real estate agent to learn what’s trending in your area. If now isn’t the right time for you, establishing a relationship with an agent you trust means knowing they will give you a call when prices begin to soften.

If you’re concerned about a potential crash, keep your eyes on the market. No single indicator shouts, “A housing market crash is on the way!” An entire chain of events would have to take place first. In the meantime, don’t make any decisions based solely on what you’re afraid may happen next.

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