Lately, I’ve been hearing a lot about a “housing correction,” which at first glance looks and sounds kind of bad.
Not as bad as say a housing crash, but still pretty bad.
The most outspoken economist on the subject lately has been Moody’s Mark Zandi, who says we’re officially in a housing correction.
But what does that mean exactly? And is it nationwide or only in select markets where home prices have run rampant?
Let’s discuss and take a moment to highlight the difference between a correction and a crash.
The Definition of a Housing Correction
If you’re at all familiar with the stock market, you’ve likely heard the old stock market correction phrase on numerous occasions.
It’s actually a pretty easily defined situation where stocks fall by 10% or more, but no more than 20%.
And it typically happens when stocks are overbought, aka overpriced. In unison, investors wake up one day and decide it’s time to sell.
The market tanks and everyone panics, which likely exacerbates things even more and eventually creates an oversold environment.
This in turn creates a buying opportunity for the non-freaked cohort out to purchase securities on the relative cheap.
If stocks exhibit losses of more than 20%, it becomes a market crash. Then the future is a little less clear.
Assuming it persists, it’s called a “bear market,” opposite a bull market. That is actually what’s happening currently in the U.S. stock market.
Similar to home prices, stocks were on a tear leading up to the start of 2022, and have since plummeted.
But Real Estate Isn’t the Same as Stock
Now back to the definition of a housing correction. While the term is used to describe both housing and the stock market, they aren’t the same.
After all, a 10% decline in home prices would be pretty dramatic, whereas stocks experience swings like that fairly often.
And once they fall, they typically recover in a matter of days or weeks. It’s not a super big deal in the grand scheme of things.
Of course, stocks are highly liquid, and can be bought and sold in seconds.
A home, on the other hand, is generally seen as illiquid, and can’t be bought/sold quickly.
Sure, the iBuyers thought they could change that, and they still might, but for now homes remain illiquid investments.
I’ve argued that’s a good thing, because it means everyday Americans don’t panic sell their properties on every piece of bad news.
Anyway, Mark Zandi already sees a housing correction underway, but refers to it simply as the end of the housing boom.
That sounds a lot more innocuous once explained, and also a bit unclear relative to the stock market definition.
As for why a housing correction is happening now, it’s an affordability thing, driven by a more than doubling in mortgage rates. Along with a huge run up in home prices.
Which brings up a good point, affordability crisis versus credit crisis.
Home Price Growth to Drop to 0% Over the Next 12 Months
As for how much home prices will fall, Zandi expects it to vary based on region, with some of the hottest markets falling the most.
This is similar to the overheated tech names in the stock market seeing the biggest declines.
Of course, home prices may not actually fall on a nominal basis. And he doesn’t expect them to fall nominally nationwide.
Instead, we will see real home price declines, those that factor in inflation, which we all know is running hot.
For example, if home prices are flat this year and inflation is 8%, property values would technically be down in real terms.
But on Redfin or Zillow they may have appeared to hold steady. Without getting overly technical, if the home value hasn’t kept up with rising prices, it has fallen.
Also note that price drops will vary by market, possibly widely. Per Moody’s, 96% of markets are currently “overvalued” based on what local incomes can support.
Housing Markets Most at Risk of a Correction
Zandi listed the worst 20 housing markets on his Twitter account last month. They are as follows:
Boise City ID
Colorado Springs CO
Las Vegas NV
Coeur d’Alene ID
Fort Collins CO
Idaho Falls ID
In red-hot Boise, home prices are apparently 73% above what the fundamentals support, which clearly isn’t good.
Other hot spots include Las Vegas, Phoenix, Tampa, Atlanta, and Denver.
After considerable interest in that list, he posted the next 20 metro areas on Twitter as well (#21-40). Those include:
Lake Havasu City AZ
Myrtle Beach SC
Carson City NV
Why It’ll Be a Housing Correction, Not a Housing Crash
Now here’s the saving grace, at least for now. While some markets may get hit worse than others, most aren’t expected to see a major decline.
This shouldn’t resemble the housing market crash during the Great Recession, which was basically all about bad home loans tanking the global economy.
Zandi points to three main buffers for today’s housing market, despite bloated prices.
Those include limited supply, with vacancy rates at all-time lows, along with high quality mortgages backing much of the housing stock.
The majority of homeowners have 30-year fixed mortgages with rates below 4% that were fully-underwritten using income/assets/employment.
In 2006, most homeowners had option ARMs that were barely underwritten, at 100% LTV!
Additionally, he notes that speculation and home flipping is low relative to what was seen in the past.
What this all means for prospective home buyers is perhaps a small discount and fewer competing bids.
What it means for home sellers is fewer offers and maybe a lower listing price, though still strong demand.
And for existing homeowners doing nothing, perhaps less home equity on paper, though still plenty for most. And certainly not negative equity.
All in all, a housing market correction should be a healthy development that evens the playing field for buyers and sellers and puts an end to crazy year-over-year gains.