A Housing Market Crash Is Unlikely, Here’s Why: Insights from Harvard

Greetings, savvy homebuyers, and investors! Today, I bring you an in-depth analysis of the current housing market grounded in expert research conducted by the Harvard Joint Center for Housing Studies. The report paints an optimistic picture of the housing market by ruling out the possibility of a crash akin to the one experienced in the mid-2000s. Let’s investigate why a housing market crash is improbable and what factors keep the market buoyant.

Quick Recap: The Housing Market So Far

Since the onset of the pandemic, the housing market has been ablaze. Home prices soared, hitting an astounding 37.5% increase between February 2020 and February 2023. However, the recent increase in mortgage rates has somewhat dampened the buyer’s demand, resulting in a 3.6% drop in US home prices from June last year to March this year. Yet, Harvard researchers firmly believe that a crash like the one in the mid-2000s is off the table.

The Four Pillars of Housing Market Stability

The researchers provided four compelling reasons why the housing market is unlikely to crash.

1. A Robust Labor Market

The first reason revolves around employment. The U.S. labor market has been vibrant, adding 339,000 jobs in May and maintaining a historically low unemployment rate of 3.7%. A robust labor market instills confidence in people regarding their ability to make mortgage payments and saves for down payments. Although there are speculations of a potential increase in unemployment rates, the labor market has defied expectations.

2. Millennial Homebuyers

Millennials continue to be a driving force in the housing market. Even though a significant portion of millennials have entered the housing market, their appetite for homeownership has not been satiated. This generation, aged between 25 and 40 years, remains enthusiastic about buying homes. Ellen Zentner from Morgan Stanley also believes that the continued influx of millennials and Gen Z homebuyers will help stabilize home prices.

3. Limited Housing Supply

Supply constraints play a crucial role in the housing market’s resilience. Builders have been cautious due to decreased demand and higher interest rates. Furthermore, existing homeowners are reluctant to sell due to higher mortgage rates, which makes it less appealing to move. The housing inventory is severely strained, with the months’ supply of existing homes below what it was in 2008.

4. Low Foreclosure Rates

Lastly, foreclosure rates today are much lower compared to the mid-2000s. This is primarily due to tighter lending standards and the lesser prevalence of adjustable-rate mortgages, which constituted about 11% of mortgages in 2008 compared to about 2% today. Lower foreclosure rates indicate a more stable market, less susceptible to sharp downturns.

But, Keep an Eye on The Economy

It is crucial to note that these pillars of stability are not impervious to economic changes. If the labor market takes an unexpected hit, it can affect the housing market. However, as it stands, the market is reinforced by the strength of the labor market, the enduring demand from millennials, the scarce housing supply, and low foreclosure rates.

Wrapping It Up

Whether you’re a first-time homebuyer or an experienced investor, understanding the housing market dynamics is paramount. The Harvard report highlights the stability and resilience of the current market despite the cooling down in recent times. While no market is entirely immune to fluctuations, the current outlook remains positive, and a housing market crash seems to be a distant concern.