The US housing market is experiencing a major downturn, with home prices falling sharply in many parts of the country. This crash is being driven by a combination of factors that are reducing demand, increasing supply, and making it harder for buyers to afford purchases.

Key Factors Behind the Crash

Several key factors are converging to create the perfect storm pushing housing into a crash:

Rising mortgage rates – Rates on 30-year fixed mortgages have surged from around 3% to over 6% in a matter of months as the Federal Reserve raises interest rates aggressively to fight inflation. This has added hundreds of dollars to the typical monthly mortgage payment, pricing many buyers out of the market.

High inflation – With inflation at a 40-year high, prices are rising rapidly on everything from food and gas to appliances and building materials. This leaves potential home buyers with less money leftover to afford a home every month after paying other expenses.

Economic uncertainty – Fears of a potential recession, stock market volatility, and job losses in the tech sector are making consumers more hesitant about making large purchases like homes. Buyer confidence has dropped significantly.

Excess housing supply – Builders overestimated demand during the pandemic and constructed a huge surplus of new homes, with housing starts at a 15-year high. That excess inventory is now coming to market just as buyer demand drops.

Expiring protections – Measures like mortgage forbearance and foreclosure moratoriums implemented during COVID have expired. That will lead to a wave of distressed sellers being forced to list their homes.

Ballooning student debt – With over 70% of student loan borrowers in prime home buying age, their average $500 monthly payment is hampering affordability and the ability to qualify for a mortgage.

Falling Home Prices Across Major Metros

With demand dropping and supply increasing, we are already seeing significant home price declines in many major metropolitan markets across the country:

5) Boise – After a meteoric rise, Boise has joined the list of deflating markets with values dropping around $50,000 from the $550,000 peak. Inventory has more than doubled.

4) Austin – The once red-hot Austin market has declined rapidly, with prices falling 10% from last year’s peak. Bidding wars have ended and homes are now sitting on the market for weeks.

3) Seattle – Seattle prices reached as high as $900,000 but have since pulled back over 10% as tech layoffs impact demand. Price drops will likely continue without influx of new buyers.

2) Phoenix, Arizona– Phoenix saw a wild 60% price surge to nearly $500k. But the median has plunged 15% from the peak as the market shifted from seller’s to buyer’s.

1) San Francisco – One of the most drastically overvalued markets has seen prices fall around 15% from the peak. Home values dropped from $1.3 million on average down to around $1.1 million.

Across smaller and mid-sized metro areas like Pittsburgh, Salem, Raleigh, and Cincinnati, price drops of 5-8% are widespread as demand declines faster than supply. Even markets like Dallas and Phoenix that still show annual price gains appear to have peaked and started falling month-to-month.

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Affordability Pushes Buyers to Rent

These falling prices would normally be welcome news for buyers. However, the rapid rise in mortgage rates has completely changed the math for affordability.

Monthly payments on a typical home are now around 50% higher than just a year ago due to rate hikes. It now costs over 50% more in monthly carrying costs to buy rather than rent in the majority of US markets.

Many first-time home buyers have no choice but to pull back and continue renting. This reduces the pool of eligible buyers, kicking off a vicious cycle of lower demand leading to more price cuts.

Investors and second home buyers were also very active during the pandemic boom. With higher rates and falling prices, they are now retreating quickly from the market rather than face further losses.

Oversupply of New Rental Properties

At the same time, an oversupply of new rental properties is coming to market just as buyer demand declines. There are now over 500,000 units under construction nationwide – the most since 1970.

While rents are still rising for now, this surge of new supply will likely lead to moderating rents and possibly even declines in the hardest hit markets. Landlords will have no choice but to offer concessions like a free month of rent to attract tenants.

We are in the early stages of a mass shift from owning back towards renting among younger Americans who find homeownership out of reach with today’s high rates and prices. This “generation rent” trend will further exacerbate the imbalance of too much housing supply and insufficient buyers.

Expiration of Pandemic Programs

During the pandemic in 2020-2021, numerous government policies provided temporary relief to distressed homeowners by allowing them to pause or reduce mortgage payments. These included:

1) Mortgage forbearance, allowing homeowners to pause payments for up to 18 months

2) Mortgage modifications to reduce payments by extending loan terms

3) Foreclosure moratoriums preventing lenders from repossessing properties

However, nearly all of these special protections have now expired. Lenders have already begun the process of demanding missed payments and foreclosing on delinquent borrowers who can’t pay the past-due amounts.

This will lead to a new surge of distressed property listings as these struggling homeowners are forced to sell. Many of them will have no choice but to short sell their homes for less than they owe on their mortgages.

The Ongoing Burden of Student Debt

Younger Americans were already delaying major life milestones like home buying due to overwhelming student loan debt that has ballooned to $1.7 trillion.

Over 70% of student loan borrowers are in the prime first-time home buying age range of 25-49. Their average student loan payment of $500 per month makes it very hard to save for a down payment or qualify for a mortgage.

While President Biden’s plan to forgive up to $20,000 in student loans will provide some relief, most borrowers would need to see $50,000 or more forgiven to really get freed up to buy a home.

Absent more aggressive loan forgiveness, student debt will continue to delay household formation for millions of younger Americans. This seriously dampens demand in the housing sector.

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Institutional Investors Prepare to Acquire Properties

While the housing downturn spells devastating financial losses for everyday Americans, large institutional investors see major opportunity.

Groups like BlackRock, Blackstone, and pension funds have been raising billions of dollars to acquire large numbers of both single-family homes and multifamily apartment buildings at discounted prices.

With ample access to credit, these institutions plan to purchase as much housing inventory as possible from distressed individual sellers and overleveraged small landlords.

Their strategy is to accumulate hundreds of thousands of properties across the US and then aggressively increase rents once they obtain dominant market share. Recent estimates suggest groups like BlackRock could own over 40% of all single family rentals within the next 5-7 years.

This illustrates how the pain of the housing crash may ultimately transfer ownership of residential real estate from mom-and-pop owners to Wall Street.

Opportunities Amid the Crisis

For real estate investors with strong finances, the housing downturn provides an opportunity to acquire properties at substantial discounts. Here are some tips to capitalize on the turmoil:

Conclusion 

In the short run, all signs point to housing demand continuing to slow while inventory rises. This will lead to further declines in prices likely until mid-2024 or beyond.

However, markets eventually rebalance. Once rates and inflation moderate, Millennials move into their prime home buying years, and fears of a recession fade, demand should return. 

With housing inventory low after years of underbuilding, price appreciation will follow in time.

Patience and discipline will be essential. The housing crash presents risks but also generational opportunities for those positioned to weather the storm. Keeping perspective on the long horizon while accumulating positions will ultimately pay off for real estate investors.

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