What's next for the housing market?

Rising rates may have put the brake on price gains. Find out what might be ahead.

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Key takeaways

  • After more than 2 years of a strong seller's market with rapid price appreciation, home-price gains may be slowing.
  • The current market looks very different from the 2007–2009 market. There's little reason to expect a similar crash in real estate.
  • However, with rising interest rates and slowing economic growth, it's possible national average prices could see some softening from here.

After more than 2 years of home prices racing away like a runaway train, in the past few months some homeowners have started to worry the market may be at risk of jumping off the tracks.

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Everyone's heard tales in recent years about cutthroat bidding wars, offers for hundreds of thousands of dollars over asking, and open houses that clogged local traffic for blocks. But the at-times frenzied nature of the market also prompted some to worry that all the pressure was forming a bubble, which could one day burst in a similar fashion to what we saw during the 2007–2009 recession.

With economic growth slowing and the Federal Reserve aggressively raising interest rates—putting immediate pressure on any buyers planning to take out a mortgage—there's little question that the housing market is at an inflection point.

Exactly what direction the market will take from here is impossible to forecast with any certainty. Whether you're looking to get into the market as a buyer or seller, or simply curious about what this next phase of the market may bring, read on for answers to 5 top questions about the housing market right now.

1. Is the roaring seller's market over?

With the inventory of listed homes beginning to pick up and with rising mortgage rates potentially pushing some buyers out of the market,1 sellers don't seem to have as much power as they did even just a few months ago.

"Mortgage rates jumped up, and it felt like parts of the country went from a seller's market to a buyer's market almost overnight," says Naveen Malwal, institutional portfolio manager with Strategic Advisers, LLC. Fewer homes are now selling above their asking or list prices (though this percentage is still high compared with historical standards).

Similarly, fewer homes are getting snapped up the moment they hit the market. Homes across the country were sitting on the market for a median of 23 days before having an offer accepted, as of June. And less than half of listed homes had a sale pending within 2 weeks (though again, this rate is still high compared with historical standards).

That said, some specific markets may still be highly competitive for buyers. The national numbers are only averages, while every local real estate market is driven by its own unique dynamics. Those dynamics can vary not just by geographic area, but also by what price points you're considering in a given area, says Meredith Stoddard, Fidelity life events experience lead.

Plus, even if buyers have a bit more leverage now than they did a few months ago, they certainly don't hold all the cards in the current market. "Inventory is still very low," says Stoddard.

2. Are we headed for a major real estate downturn?

Some owners and buyers may be worried that the market's recent dynamics have formed the ingredients for a housing-market crash, similar to what parts of the country experienced during the 2007–2009 recession.

But there are big differences between the characteristics of the housing market today versus back then. For one thing, "The financial state of the current homeowner is much stronger than it was in 2008," says Malwal. The home-price run-ups of the 2000s were fueled in no small part by subprime mortgages—meaning mortgages to borrowers with weaker finances. As the chart below shows, mortgages have generally been issued to much more creditworthy borrowers in the past decade than they were in the lead-up to the 2007–2009 recession.

Mortgage delinquency rates are extremely low by historical standards.2 And the typical US household is simply in better shape with their debt than it was in the 2007–2009 period—having to spend much less of their disposable income on debt than they did back then.

"The homeowners who have been buying homes are generally more able to afford them," than the average buyer in the run-up to 2007–2009, says Malwal.

That financial strength may not stop home values from slipping. But it means that the US market is unlikely to repeat the extreme dynamics of the Great Recession, when floods of foreclosures swept home prices off a cliff—at least in parts of the country.

3. Are prices likely to soften?

Again, no one can predict with any certainty exactly what prices will do. However, it seems likely that the rate of price gains will slow, at the very least, or that we could see a period of prices flattening or softening, on average.

"It would be surprising if home prices continued to appreciate at the rate that they have the last couple of years," says Malwal. Although national indexes of home prices have continued to march up in recent months, those indexes are backward-looking. Some regions are beginning to see an uptick in price cuts on existing listings, which could provide a better clue to the current moment's price trends.

The chart below shows median home prices forecasted by the National Association of Realtors®. The group expects prices to decline slightly over the next 2 to 3 quarters before recovering. However, the total anticipated drop would amount to a decline of less than $26,000, for an existing home at the median value point. Not nothing—but not exactly falling off a cliff, either.

Regionally and locally, of course, prices may beat or lag the national averages. During the pandemic, the strongest price gains generally weren't seen in major cities like New York and San Francisco, but in midsized regions like Austin and Boise, as city dwellers fled to more affordable areas. Some of those areas with the greatest run-ups may also be at risk of greater declines. "If those were permanent relocations then those might be permanent price increases, but if they were temporary, then maybe not," says Stoddard.

At a national level, the degree to which prices might decline could be limited by simple supply and demand. Millennials own homes at lower rates than previous generations did at the same life stage, and many would still like to get into the market. Meanwhile, many baby boomers are choosing to stay in their homes well into retirement, rather than downsize or move into assisted living. "There seems to be a mismatch between the number of people who want to buy a home and the number who are looking to sell," says Malwal.

4. How much pressure may further rate hikes put on prices?

While the Fed has already raised rates significantly this year, it has also signaled that it's not done yet. Exactly how much pressure rate hikes put on home prices may depend on how high rates ultimately go. How high the Fed has to take rates may, in turn, depend on the trajectory of inflation.

Of course, this isn't the only time the US housing market has gone through a period of rising interest rates. During the early 1980s, the average rate on a 30-year fixed-rate mortgage stayed in the double-digits for years, eventually peaking at more than 18% in 1981.4 As the chart below shows, average home prices suffered some slight setbacks during this period, but did not go through any major downturn.

To be sure, the housing market of the 2020s isn't the housing market of the 1980s, so the comparison only goes so far. Homes were generally more affordable 4 decades ago, and another difference is that at the time, owners could potentially deduct 100% of their mortgage interest expenses from taxable income (while today's buyers can only deduct interest on the first $750,000 of a mortgage).

But one key reason prices didn't suffer more might be because that period, like the current period, was characterized by high inflation. Holding all else equal, higher interest rates might in theory hurt real estate prices. In practice, however, high interest rates tend to go hand-in-hand with inflation, which generally leads to higher home prices. "Historically, home prices have risen with inflation," says Malwal.

5. Should I wait this period out before I make a move?

Buying or selling a home is scary and stressful even in calm times. It can feel even more treacherous to wade into the market when its very foundation is shifting under your feet.

Stoddard says that if you're facing this dilemma, it can actually be helpful to tune out some of the economic data and market forecasting. "You can drive yourself crazy wondering ‘Is now the right time?' ‘Should I do it next year?'" she says. "This is a time to step back and assess what's important to you."

If you're a seller, instead of fretting over market dynamics, refocus your energy on your reason for selling. Perhaps you simply need or desire to relocate to a new area, in which case the exact price you receive may be of secondary importance. If moving is less urgent, consider which course of action you'd regret more—staying in your house longer than you'd intended, or selling into a softening market.

If you're a buyer, take some time to run and rerun the numbers on how much house you can afford. Get comfortable with the dynamics in your local area, and do a rent-versus-buy analysis for your personal situation—including thinking about how long you'd be likely to live there.

"If you find a house that's right for you and your family, you feel good about making the payments, and you want to be there for the next 5, 10, or 20 years, then don't worry so much about timing the market," Stoddard says.

After all, waiting for the market to look less uncertain could leave you waiting a long time.

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