Key points to remember
- Morgan Stanley predicted a 10% decline in house prices from June 2022 to 2024. This juxtaposes the 45% increase in prices the US housing market experienced between December 2019 and June 2022.
- Some markets are already showing significant price declines, topped by metros like San Francisco, Seattle and San Diego.
- While house prices are likely to fall, the demand for housing caused by the current shortage in the United States is likely to support any cataclysmic loss for homeowners. We’re probably not looking at a 2008 situation.
Between June 2022 and the end of 2024, Morgan Stanley experts predict a decline of about 10% in average national house prices. At first glance, these numbers may seem ominous, but it is important to consider the context.
First, this level of market cooling does not necessarily indicate a “crash”. Typically, when we see a housing market crash, we expect prices to drop by at least 20%. That’s nowhere near what the experts are currently predicting – unless we enter a deep, dark recession that triggers high unemployment rates. Even then, it probably wouldn’t be as bad as 2008.
There are several factors preventing the market from plummeting. Let’s take them into consideration before reviewing the hardest hit cities.
The market had been in an unsustainable rally for two years
Home values have skyrocketed since the pandemic began. From December 2019 to June 2022, prices increased by 45%. Even after factoring in recent price declines, home prices have risen 38% since March 2020. This level of growth was unprecedented and unsustainable. At some point he had to slow down.
The fact that he wasn’t viable is one of the very reasons he’s slowing down. The housing market has far outpaced wage growth, so even though we’re in the midst of a housing shortage, far fewer people can afford to buy.
The housing shortage in the United States is not improving
The backdrop is that America is, and has been, in the midst of a housing shortage – even before the pandemic. To solve this problem, experts from Freddie Mac and Up for Growth estimated in 2021 that America needed 3.8 million new homes. If you ask the National Association of Realtors, that number may be closer to 7 million new homes.
However, new construction is slowing down. Housing starts fell 8.8% year-over-year between October 2021 and October 2022, and permit applications for new construction fell 10.1% over the same period.
This means that any decline in house prices over the next year likely has a floor. Although fewer people willing to buy can due to high prices, the shortage of supply will hopefully prevent supply from significantly exceeding demand.
The result of this equation is not pretty for tenants – a quarter of whom already pay more than 50% of their income to their current landlord. House prices may not come down to a point where these people can afford to buy.
But for homeowners, it can provide a little reassurance that they’re not at such a high risk of losing their home. Even in recent months, when home prices have started to decline in most markets, foreclosure rates have still not reached pre-pandemic levels. And the market circumstances that caused so many people to find themselves upside down on their mortgages in 2008 are no longer present today.
Where are house prices falling fastest?
This does not mean that house prices will not fall at all. In fact, according to the S&P Case-Shiller Index, home values fell 2.6% between June and September 2022. They were still up 7.81% year-over-year, but the clip of short-term declines was notable.
Most metropolitan areas considered by S&P saw declines over the three-month period in 2022, but these cities saw the largest declines:
- San Francisco: -10.36%
- Seattle: -9.55%
- San Diego: -7.24%
- LA: -5.61%
- Denver: -5.60%
- Dallas: -4.34%
- Portland: -4.25%
- Vegas: -3.69%
Of the two metros that still saw price increases over a three-month period, they all saw their prices drop from August to September 2022.
Why are prices falling faster in these cities?
The best case study might be the market that has seen the biggest price drops: San Francisco.
The San Francisco market is facing the same problems as the rest of the country: unaffordable real estate prices and high interest rates (although a bit lower in November). The biggest difference is that San Francisco has fallen again.
San Francisco has long had one of the most expensive real estate markets in the country. Some of the highest prices in the country are the ones that drop the most.
San Francisco in particular has seen a mass exodus since the start of the pandemic, with the county losing an estimated 6.7% of its population between July 2020 and July 2021 alone. One explanation for this is that as more positions became remote from March 2020, tech workers – who are heavily concentrated in this region – reaped some of the best work-from-home opportunities.
And why pay for a house in one of the most expensive real estate markets in the country when you could live and work anywhere else?
As some workers return to the Bay Area as some companies cut flexible work opportunities, the effects of mass remote work migrations have still significantly scarred the city’s real estate market.
The other cities on the list, from Seattle to DC, have experienced similar phenomena, although each market’s situation is partly unique.
For example, house prices in New York have fallen, but not as much as in San Francisco. New York-based companies have implemented more mandatory back-to-office policies, which have forced more people back into the city. This may be a partial cause of its softened price cuts compared to San Francisco.
At the end of the line
The housing market is expected to decline in value through 2024, but this is more of a market correction than a stock market crash. Because America has a housing shortage, demand is likely to keep house prices from falling into oblivion.
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