Will Housing Market Crash? JP Morgan Gives Update on Predictions

A lot of Americans cannot afford to a buy a home right now.

In October, previously owned home prices rose 3.4 percent to a median amount of around $392,000, the fourth consecutive yearly jump in prices the sector has seen, according to the National Association of Realtors, underlying the challenge for buyers in the market.

Does the housing market have to crash for homes to become affordable again?

The used homes market is down substantially—existing homes sales are down 40 percent—from the beginning of 2022, but prices in that segment of the market are still elevated, Joe Seydl, a senior markets economist at J.P. Morgan, told Newsweek on Wednesday.

"That's a sense in which it's been a very unusual housing cycle from an activity perspective, we're down, but prices certainly haven't crashed," he said.

While there exists a perspective in the market that for housing to be affordable prices may need to crash, Seydl eschewed that view.

"There's a view out there that the only way we could restore affordability is if home prices came down significantly," Seydl said. "That is a risk that could happen, that would likely be in a recession scenario for the U.S. economy. That's not our view."

One way to cure the affordability in Seydl's view is to have incomes grow as they have been over the next few years to allow consumers to be able to afford a home.

He added that if mortgage rates stay where they are, and home prices remain unchanged and incomes continue to grow, it will take about three and a half years for folks to be get back to levels of affordability.

The housing market is facing significant challenges as low supply of homes, high prices and elevated mortgage rates have stymied the ability of prospective buyers to afford a home.

The Federal Reserve has raised rates since March 2022 to bring down historic levels of inflation that at one point had skyrocketed to a four-decade high. This most aggressive increase in rates since the 1980s helped push up borrowing costs for things such as cars, business investments and houses.

The low supply of homes and increased demand has helped push up prices, particularly in the previously owned homes market.

Seydl said that overbuilding of homes prior to 2008 contributed to the global financial crisis that led to the deepest recession since the 1930 crash. The housing bubble burst and threatened to bring down the American economy with it.

The market slowed, builders went out of business, which then led to a shortage of homes for sale in the market, currently at approximately 2.5 million units.

"So from 2010 up until really before the pandemic, we were under-building relative to population pressures in the United States," Seydl said. "That that has led to a structural shortage."

Stringent regulations have also stifled the growth of new homes, particularly in big city metropolitan areas. Meanwhile, sellers are sitting out the market as they are reluctant to give up cheaper mortgages they secured either before or after the pandemic and test out a market where they may need to pay upwards of 7 percent for a home loan. This dynamic has frozen the previously owned homes market.

But there is evidence that there is some optimism in the new housing market, where buyers are willing to take the leap into homeownership, despite elevated mortgage rates. Prices are down 14 percent from October of last year in this section of the market, Seydl told Newsweek.

Builders are willing to offer incentives to close deals, even assisting buyers to secure cheaper mortgage rates.

"Builders have very high margins, [so] they can sacrifice some of that margin to offer those incentives," Seydl said. "So, ironically, even though the existing home sales market is frozen, and activity has really collapsed there, it's not at all frozen in the new housing market."

New housing construction and active buying was happening in places that Seydl describes as low cost-of-living areas, such as Phoenix, Austin, Texas, and Minneapolis. Remote work, which is four to five times where it was prior to the pandemic, is encouraging buyers, especially millennials, to seek opportunities to buy homes.

"That's one of the key driving forces as to why we're seeing some of these metro areas that really were not doing all that exceptionally well prior to the pandemic," Seydl said. "Like, for example, Cleveland, Ohio. That is now perking up because you're getting a lot of younger folks, especially millennials, moving to these lower cost-of-living areas."

Seydl suggested that if the economy avoids a recession and the bond markets stabilize, it could lead to a drop in mortgage rates and help solve the affordability challenge many Americans face when trying to buy a home.

"If we assume mortgage rates fall by 1 percentage point, it would actually speed up the timeline to achieve affordability in America. It would reduce the timeline from three and a half years down to two years," Seydl said.