Why the Housing Market Crash Could Get Worse in 2023

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As the Federal Reserve continues to engineer the long foretold “soft landing,” housing has come into focus. Notions of a housing market crash continue to circulate the market. Now, Goldman Sachs says the real estate market may well take a turn for the worse next year. What’s going on with housing?

The housing market has been in something of a state of turmoil this year. With mortgage rates having climbed as high as nearly 6% — more than double many projections — home sales, home listings and even home construction have plummeted. In fact, average home prices fell 0.77% from June to July, the first month-over-month decrease in three years.

Many view this as a sign of an impending housing collapse. Not for nothing, housing has run a bit too hot for a bit too long. While it’s normal for home prices to rise over time, quarantine home price growth accelerated abnormally. Since the start of the pandemic, the average price of homes in the U.S. has climbed from $329,000 in Q1 2020 to $440,000 in Q2 2o22. That’s a more than 30% increase.

Of course, this is not exactly a surprise. As millions of Americans collectively went inside, demand for homes increased. All the while, the number of homes for sale and home construction fell through the roof. Basic economics will tell you this is essentially a recipe for rising prices.

Things are quickly changing, however. Now, many economists expect housing to get its just deserts as soon as 2023.

What Would a Housing Market Crash Look Like in 2023?

Mortgage rates remain one of the single most important factors when it comes to purchasing a house. As the Federal Reserve has repeatedly raised interest rates this year, mortgages have largely come along for the ride. And, per Fed Chair Jerome Powell’s recent speech, more rate hikes are likely on the way. With this in mind, many expect mortgage rates to continue to climb. With that comes many of the housing recession fears economists have long dreaded.

According to Goldman Sachs, change is coming for the once-thriving housing market.

“There are strong signs that the surge in housing sales and prices during the pandemic has come to an end. Goldman Sachs Research expects growth in advanced economies to slow in coming quarters and the recent housing trends only reinforce that expectation. And while a tight housing market may be enough to avoid a slump, the rapid deterioration in affordability and large drops in home sales suggest that a housing downturn is a real risk.”

That said, it’s worth pointing out that slowed price growth is not the same as a true fall in prices, like what happened in 2008. The limited supply of available homes for sale in the U.S. means the likelihood of the overall U.S. housing market dropping substantially — rather than merely slowing in growth — is slim.

Today’s housing market is not the housing market of 2008. Lending laws are far more stringent, home price growth has already organically slowed and defaults are still relatively rare. As notions of a housing recession grow some very real horns, it’s important to understand the mechanisms that prevent such an occurrence, despite the growing relevance.

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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