Crash course

You knew it was coming sooner or later. U.S. home sales have disappointed ever since interest rates kicked the legs out from under the market. In April, new home sales were down 6.6% YoY at 634,000 annualized. Existing home sales came in at 4,140,000, down 1.9% YoY.

And yet prices keep rising.

 Zillow’s Single-Family Home Value Index was up 4.4% YoY in April, while the National Association of Realtors logged a 5.7% increase. Redfin says the median sale price in April was $433,558, “the highest level on record” and a 6.2% YoY increase.

How can prices continue to rise while sales are tanking? They can’t. Everyone says something’s got to give, so it’s no surprise that a lot of people are starting to wonder whether the market will crash like it did during the 2008-10 recession, when home values fell nearly 25%.

Last month Bankrate.com took the bull by the horns and asked analysts whether a housing crash was in the cards. The answer was simple and definitive: “No.”

Five reasons: 1) For-sale inventory is low and scarcity pushes prices up. 2) Builders can’t build homes at a pace that would make scarcity go away, at least not yet. 3) The largest generational cohort in U.S. history (Millennials) is in its prime home-buying years so demand is solid. 4) Lending standards are so tight they squeak, which means 5) there is no looming wave of foreclosures like there was in 2006.

Not everyone agrees, of course. Wall Street analyst Meredith Whitney thinks we’re overlooking a critical factor, which she explained to Fortune in an April article titled “The Oracle of Wall Street Expands on Why the Crisis of the American Male Will Send Home Prices Crashing 30%.”

Whitney, who achieved oracle status 20 years ago for predicting that the housing bubble would pop, says it’s all about “young men living at home and playing video games.”

She says gaming is responsible for a breakdown in social skills, citing a recent Pew Research study that found that “the share of single men looking to date or be in a relationship has declined since 2019.” The upshot, she told Fortune, is that “a portion of young, single men ‘haven’t had sex in the past year and don’t seem to be bothered by it.’”

No sex apparently eliminates the need for young men to move out of their parents’ homes, which in turn will cause the market to crash. Says Whitney, “Unless you’re creating a household, there’s no reason to buy a house.”

If she’s right, there probably isn’t a lot we can do about the situation. Zoos have had the same problem with pandas for decades, and have yet to find a solution.

But given that virtually everyone else says the housing market will not crash, it may be more productive to look at how the affordability conundrum might play out.

Home prices fell during the Great Recession, but bottomed out in February 2012. From that point until the pandemic hit in March 2020, the typical single-family home gained value at an average rate of 0.487% per month according to Zillow.

The pandemic stopped everything in its tracks , but only briefly. From September 2020 through August 2022, home values rose at an average rate of 1.303% per month— more than three times the pre-COVID rate. From Q1 2012 through Q4 2023, the share of median-income households that can afford a median-priced single-family home fell from 78.8% 37.7%.

So where does that leave us? Investopedia ran the numbers: “To make homes as affordable as they were on typical incomes back in February 2020, home prices would have to fall 40%, the average mortgage rate would have to plummet to an unheard-of 2.45% from its December 2023 average of 6.80%, or median household income would have to skyrocket to $129,096 from its December level of $77,730.”

Nothing short of a complete global economic meltdown could cause any one of those things to happen. But it’s entirely plausible that smaller changes in each of the three will break the affordability logjam. Here’s an example:

In February 2020, the typical single-family home was worth $249,710 according to Zillow. The average 30-year mortgage rate was 3.47% and average earnings were $4,243 per month. If you bought a typical home with 5% down, your mortgage payment would have been $1,061 per month, or 25% of monthly earnings.

In April 2024, the typical home value was $359,300. The average mortgage rate was 7.11%, so with a 5% down payment the monthly mortgage payment would be $2,296. Average monthly earnings are $5,165, so that’s 44.5% of income. That’s a deal-killer not only for buyers, but most lenders, too.

But that’s not as bad as it sounds. Wages are rising at the rate of about 4% per year. In the scenario above, a 5% decline in home prices coupled with a 5.5% mortgage rate plus a 4% increase in household income would reduce the monthly payment to 32.5% of earnings for the average buyer. Lenders prefer 28%, but 33% isn’t bad.

When the government introduced VA and FHA loans plus 30-year fixed mortgages just after World War II, the U.S. became one of the most affordable nations on the planet to be a homeowner. Through the 1950s and 60s, the median price of a home was less than three times median household income. As late as the mid-2010s, the U.S. was an outlier among countries with housing markets similar to ours.

We’re not an outlier anymore, but that doesn’t mean the U.S. is unaffordable. If the numbers move in the right direction over the next year—even just a little—chances are the recovery will come faster than most people think.

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