Bubble. Crash. Recession. As US home prices rise at record rates, so does the fear that they will crash like they did in 2007.
But how high is the actual risk of a housing recession in 2021? How likely is it that home prices will fall for a sustained period of time? Home.LLC‘s team of housing economists decided to tackle this question in detail.
We took a three-pronged approach to pin-point the risk of a housing recession:
- We started by identifying the risks to home price growth
- We put each risk into one of two buckets – (a) Demand & (b) Supply
- We rated each risk on two parameters – (a) Probability of occurence & (b) Importance (impact on home prices)
Here’s what we found.
The Overall Risk Of A Housing Recession is Low
- Important factors are not likely to occur (example: oversupply from foreclosures)
- Factors which are likely to occur do not heavily impact home prices (example: rising interest rates)
Let’s look at each demand and supply factor in detail.
The higher the supply, the greater the risk to home price growth. There are three such “oversupply” risks:
- Oversupply from resales
- Oversupply from new construction
- Oversupply from foreclosures
Let’s analyze each risk in detail.
Oversupply From Resales
Supply from resales (existing homes available for sale) has a huge impact on home prices. If supply is higher than demand, homesellers may be forced to reduce prices to sell off their properties.
However, the US housing market is massively undersupplied. In fact, the US has more registered realtors (1.46 million) than it has units for sale (1.3 million)!
It’s clear that the risk of oversupply is extremely low.
Oversupply From New Construction
There is a chance of oversupply of new homes available for sale – the total number of permits issued has been increasing since 2012. In April 2021, 120,000 new building permits were issued, which is higher than average.
But new home sales account for only a small fraction (10-20%) of overall supply. New construction simply don’t impact home prices heavily enough to make a real difference.
Oversupply From Foreclosures
Foreclosures were a big part of the reason why home prices crashed during the Great Financial Crash in 2007.
But the probability of a mass foreclosure event in 2021 is unlikely, for two reasons:
- The share of loans in forbearance increased in 2020 due to the government’s mortgage forbearance program. But this number has been continuously falling since October 2020.
2. Short sales have only accounted for 1.5% of total exits from the forbearance program over the last year. Thus, most homeowners who are exiting forbearance are doing so on their own terms – foreclosures have not increased.
Bonus Read: We talked to Fortune Magazine about why we think the end of the eviction moratorium will not result in oversupply.
The lower the demand, the greater the risk to home price appreciation. There are 5 major demand risks:
- Rising interest rates
- Tighter underwriting
- Lack of buyers
- Dropping wages
- Stock market crash
Let’s look at each risk in turn.
Rising Interest Rates
Mortgage rates are at an all time low. As the economy rebounds, interest rates should start climbing slowly but steadily.
However, home prices have kept on increasing even during instances of high interest rates.
Tight underwriting can choke off demand at the source by qualifying fewer people for a mortgage.
However, credit availability is already at a historical low, and is unlikely to go down further.
Lack Of Buyers
Urban Institute has done a lot of amazing work projecting homeownership trends. They predict that Millennials and Gen Zs will drive housing demand over the next 2 decades.
Combined, Millennials and Gen Zs account for 48% of the US population.
Wage and income growth are both important in generating demand for homes.
Here’s the good news: wages have grown through both of the last 2 recessions. The likelihood of wages dropping is very low.
Stock Market Crash
The stock market can be very volatile. It’s possible that we may see a market crash during the next 1-2 years.
Luckily for homeowners, home prices are anything but volatile. In fact, home prices have risen most of the times the S&P 500 has crashed.
US real estate is a very stable market. It does not crash except in very rare scenarios. There’s a reason prices have been continuously increasing for the past 100 years and more!