Is a Housing Market Crash in 2023 Off the Table?

Source: shutterstock.com/Roman Bodnarchuk

With mortgage rates starting to ease back down to earth, fears of an impending housing market crash are beginning to lose fervor. Heading into the new year, is housing primed for a crash? Or for a recovery?

Depending on who you ask, you’ll receive a variety of different answers. That said, the bear case for a housing recession is starting to weaken in a big way: mortgage rates are falling. From a peak above 7% in mid-November, the 30-year fixed mortgage is currently down to around 6.5%. That’s a notable change over the course of just one month.

As a result, the once ice-cold housing market is starting to see buyers return. Just last week, an index measuring mortgage application volume increased 4% from the week prior, according to the Mortgage Bankers Association.

Mortgage rates have been the primary source of concern for real estate through much of the year. Indeed, as the Federal Reserve raised the federal funds rate from 0% at the start of the year to its current 4% level via increasingly hefty rate hikes, higher mortgage rates have been an unwelcome byproduct for many would-be home buyers.

When mortgage rates climb, housing demand typically falls, as has been the case this year. In July, mortgage application volume fell to its lowest level since 2000, adding fuel to speculation of an impending housing crash.

It seems like the housing narrative may have taken a bullish shift, however. So, what do lower mortgage rates mean for the housing market in 2023?

Housing Market Crash Fears Ease as Home Buyers Return

With falling mortgage rates bringing buyers back to the market, there’s good reason to have a sunnier view of U.S. real estate in 2023. A greater economic slide may still hurt housing. But notions of a debilitating crash seem to be falling to the wayside.

Real estate author and founder of a New York-based real estate syndicate, Matt Picheny believes housing is more primed for a mild downturn than any sort of 2008-style crash. Picheny said the following in an interview with InvestorPlace:

“I’m not seeing a huge crash, just because the fundamentals seem very different to me than they did in 2008. I’m not saying we’re not going to have a correction, but there’s a reason why 2008 was called the Great Recession […] Usually, in a recessionary environment, we see a 2% to 4% decrease in home price. That’s what the data that I’ve found says on average, nationwide. I know that in 2008 we were seeing 15% to 20%. Are we at 2% to 4%? Maybe we have more. Are we below 20%? I don’t think so. But I don’t have a crystal ball.”

Picheny’s point is worth considering: what’s happening currently shares little in common with the housing market crash of 2008. Lending laws are more stringent than ever, large swathes of Americans aren’t at immediate risk of foreclosure and, while home prices may be a bit inflated, it’s generally a product of supply and demand rather than generous, unhinged speculation.

Despite Optimism, Housing Still Susceptible to Losses in 2023

Of course, one month of declining mortgage rates isn’t exactly the end-all be-all for housing. The Fed will likely continue to hike rates until the federal funds rate hits around 5%. That means 10-year Treasuries — and more importantly, 30-year mortgage rates — are liable to continue rising, at least near-term.

A 15% to 20% drop in home prices may seem more fantasy than reality. But the fact is that many realtors and economists do expect a sort of pullback in real estate next year. This, of course, is in no small part attributable to rising recession projections.

Just recently, the New York Fed’s Recession Probability model estimated a 38% chance of a recession in 2023, off the back of one of the most inverted Treasury yield spreads in recent memory. Although 38% may not seem high at a glance, in context, its one of its highest readings in recent memory. According to research firm DataTrek, 38% reflects a near 100% chance of a recession.

Should a recession take root, expect interest in homes to wane. While that may not translate to massive price slashing across the entire country, regional markets could be susceptible to grave losses. In August, Moody’s Analytics identified that 183 of the 413 largest regional housing markets were more than 25% overvalued. Fortune believes these markets could fall by nearly as much, should the U.S. enter a recession. These losses are significant and could be detrimental to many mortgage owners, despite the fact that national home prices aren’t liable to fall by nearly as much.

For Picheny, this potential downtrend in prices may not be all bad, given the growth of home prices these past few years.

“I think we’re going to see home valuations, real estate valuations, just in general […] adjust. I think they will continue to adjust and adjust downwards, but I don’t see a massive crash. I see this as more of a correction and a correction that maybe was needed. Maybe the real estate market was a little overheated because of this really inexpensive debt we were able to get. I don’t know that that’s healthy for the economy for us to sustain the debt at that low amount. So having it come up a little bit is fine.”

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

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