Will the U.S. Housing Market Crash in 2022?

Inflated prices and rising interest rates have people concerned that we could see a return of the 2008 housing crash.

Housing prices exploded during the pandemic. Due to a mix of low interest rates and limited availability in desired areas, people bid up the price of homes leading to an overall increase of 11.3% in 2020 and 16.9% in 2021, according to data from Freddie Mac.

"The increase in house-price growth will be less transitory than the increase in consumer prices, as the U.S. housing market will continue to struggle with a shortage of available housing for many months to come," wrote Norada Real Estate.

It's a seller's market. But rising home prices, relatively easy-to-get mortgages, and consumers who seem unconcerned about prices raise the specter of the 2008 housing market crash. 

Market conditions are, of course, not exactly the same, but the current situation does have many people questioning whether what goes up must come down.

Is a U.S. Housing Market Crash Inevitable?

“It is unlikely the housing market will crash because of two main factors," Community Capital Management Chief Investment Officer Andy Kaufman told TheStreet via email. 

"(1) interest rates are at, and will likely remain at, historically low levels (even if rates move higher by a percent or two) making long-term mortgage financing economical and (2) due to strong wage inflation, first-time homebuyers or buyers looking to upgrade would likely be eager to step in should prices start drop.”  

That echoed the opinion of many of the industry experts who responded to TheStreet's request for comment on whether the U.S. housing market will crash. 

Not crashing, however, does not mean an endless increase in prices, Tenpao Lee, professor emeritus of economics at Niagara University, told TheStreet. Lee noted that conditions are very different from the Great Recession of 2008-2009, when the housing market crashed more than 40%.

"During the Great Recession of 2008-2009, the demand for housing disappeared due to the higher unemployment rate, while the supply/inventory/construction was high with booming expectations initially followed by tremendous defaults," he wrote. 

"Both demand and supply pointed to lower prices. As a result, housing prices declined/crashed to an unprecedented level."

That's not likely to happen in 2022, he explained.

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"Today, with higher expectations of interest rate and inflation, the demand for housing may disappear a little, but the supply of housing has also declined due to the higher labor and lumber costs caused by the supply chain issues under the pandemic," he wrote, 

"In other words, the demand side indicated lower prices while the supply side suggested a different story. In addition, the unemployment rate is recovering gradually which may help stabilize the demand side. Therefore, the net effect on housing prices may result in a decline but probably will not be a crash."

Why It's Not 2008's Housing Market

While on the surface 2022 has a lot in common with 2008, Certified Financial Planner Julian Morris explained why the current situation is very different.

"Unlike 2008, this market is driven by supply and demand. Younger families are moving out of the cities to suburbs. The acceleration may slow, but unless there is a glut of extra housing, which there is not, there will be no imminent crash," he wrote. "2008 was driven by folks getting adjustable-rate mortgages and overleveraging. They defaulted and caused a glut. This time is different."

In 2008 banks made it very easy for pretty much anyone to get a mortgage. Credit standards were low overall and people with decent-to-good credit could get lo loans without the bank verifying their income or their assets. 

That created an environment where even a slight economic downturn made many people likely to default (and that's exactly what happened).

"Government-backed loans from Fannie Mae and Freddie Mac have also tightened their loan guidelines, which helps keep bad loans from overwhelming the system," wrote Perrille Premier Realty Group's Melissa Perrille.

That lack of easy-to-get money for unqualified buyers gives the housing market a level of security and protection from a crash it did not have in 2008. 

The reality is that unless something changes in the economy that leads to increased defaults (or lenders get lax on their standards as they did in 2008), the market will remain strong for inventory-related reasons.

"Right now, supply is still very tight and demand is still very high," wrote Christopher Avallon, a real-estate broker. "Even with rates going up, if inventory does not increase, we will be seeing more of the same from 2021."