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Home Buying

Is the Housing Market Going to Crash?

As a part of a recent work retreat, the Ramsey Personalities and I chose to go skydiving. Well, some of the Ramsey Personalities and I did. Others chose not to jump. Because jumping out of perfectly good airplane—well, that’s just scary, right?

I have to admit, the first time I did it, I really thought I’d be too afraid. But once I got up in the air, the weirdest thing happened. All my preparation, all the learning about how the equipment worked, the quality of the people we were diving with—it all helped me to relax. And I ended up having fun.

Statistically speaking, skydiving is a safe activity. In 2021, there were at least 3.57 million jumps in the U.S. and only 10 fatal skydiving accidents. That’s a rate of .28 fatalities per 100,000 jumps.1 Somehow, just knowing those facts takes away the fear and changes the perspective.

The point is, our feelings are not always accurate representations of reality. In the absence of facts, we can overreact, make-up stories in our heads, and let fear take over. But having facts in a scary situation can help us calm down.

Icon of a house

Watch the replay of our Real Estate Reality Check livestream.

Right now, the economy and the real estate market seem like scary situations. If you’re getting ready to buy or sell a house, it might feel like you’re jumping out of a plane. You’re worried, uncertain and wondering Is the housing market going to crash?

It’s All About Perspective

Yes, there’s lots of speculation about the housing market right now. But crazy headlines and talking heads only affect your long-term money goals if you let them. Don’t fall for the exaggerated fishing tales. And for the love of God, don’t let some twit on Twitter be your only economic indicator!

When it comes to real estate, my perspective comes from life experience, time in the market and data. My parents were in real estate, so I grew up in the business. I’ve had my real estate license since 1978 and have ridden the waves of housing markets through all kinds of economies over several decades. I’ve bought and sold millions of dollars of real estate. Regardless of what seems big and dramatic in the moment, I’ve learned to base my financial decisions on data. Period.

So, what’s the current data telling us? Well, let’s do a real estate reality check. First, let’s talk about house prices.

Housing Price Increases

House prices increased by 29% in 2020 and 18% in 2019.2 These are unprecedented numbers! But what caused the spike? People coming out of their collective caves after quarantine and diving into the housing market like a Baptist after a casserole—that’s what!

Prices are still projected to be up 8% overall this year.3 And in 2023, prices are projected to be up 3-4%, which gets us back to the average increase for residential single-family homes the last 50 years.

historic median home prices chart

Supply and Demand

One thing and one thing ONLY drives house prices: Supply and Demand. Any time there’s more supply of something than there is demand, the price goes down. Any time there’s more demand for something—a lot of buyers chasing a small supply of goods—the price goes up.

For example, if there’s a toilet paper shortage (remember that one?), prices will spike. If there’s a shortage of oil and gas because Washington has turned off the spicket, prices will spike (we’re still living this one!). Real estate is no different. When demand exceeds supply, house prices go up. For housing prices to go down, supply has to exceed demand.

Since we’ve had a shortage of homes for about the last two decades, plus the demand is high, the prices are therefore high. Because of this low supply and high demand, people have been willing to pay ridiculous amounts of money for homes—in many cases, way more than the appraisal price. This has caused people who weren’t even looking to sell their homes to be drawn into the market and become sellers.

Still, people are freaking out and saying, “Dave, it’s just like 2008. The market’s going to crash.”

Well, let’s take a closer look at the data.

Housing Shortage

In 2008, demand fell dramatically below supply. But currently, our supply of houses for sale is about 1/4 of what it was in 2007, and new housing starts (supply) is 1.38 million—35% lower than the 2.07 million in 2005. 4 As you can see from the inventory and housing starts graphs below, any way you cut it, low used supply and low new supply equals low supply.