Graham Stephan: 4 Things To Know About the Reverse Housing Crash of 2024
Owning a home is part of the American Dream. But for many, it’s become even further out of reach. Rising home prices and interest rates have left would-be homeowners sitting on the sidelines, waiting for the market to become more affordable again.
When will prices and interest rates drop? Not any time soon, according to real estate expert Graham Stephan in his late 2023 video, “It’s Here: The Reverse Housing Crash of 2024.” Here’s what he had to say.
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Understanding Prior Market Downturns
Stephan starts with a short history of real estate market downturns. The most severe one occurred between 1929 and 1932, when the stock market hit record highs from speculation and everything crashed — including housing. Home values plunged an astonishing 67% — and took almost 30 years to recover.
The early 1990s saw a dip in home values of around 10% following the savings and loan crisis correction. Prices largely stayed flat until 1997.
Then, in 2008, a housing crash fueled by short-term, adjustable-rate mortgages led home values to decline an average of 29%. Since then, home prices have shot up, as have interest rates and inflation, making the market increasingly unaffordable.
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What Analysts Have To Say About the Housing Market in 2024
Stephan considered analyst predictions on the 2024 housing market from several sources, including Wells Fargo, Morgan Stanley, Redfin and Intercontinental Exchange. Here’s what each one predicted.
Wells Fargo
According to analysts at Wells Fargo, mortgage interest rates of nearly 8% and rising home prices are making it unaffordable for many to buy a home — and risk tipping the entire market into a 1980s-style recession.
Even if the Federal Reserve lowers rates, financing costs will likely remain high, reducing the chances of a market rebound. Higher interest rates could also impact supply and new constructions and dissuade homeowners with low-interest rate mortgages from putting their homes up for sale.
Wells Fargo predicted a 2.5% rise in home prices by the end of 2024 and 4.4% in 2025.
Morgan Stanley
Morgan Stanley’s housing market predictions are a bit more optimistic. It expects weak home sales until mid-2024, which will gradually increase into 2025, when affordability will improve. Morgan Stanley anticipates rising supplies from new construction and homebuilding activity, resulting in modest price declines.
Analysts at Morgan Stanley predict a reduction in interest rates over the second half of 2024, bringing real interest rates down to pre-COVID-19 pandemic levels of 0.4% by the end of 2025.
While Morgan Stanley’s price and interest rate predictions paint a considerably more rosy picture for the future, analysts did note a possible slowdown in consumer spending due to a cooling in the labor market.
Redfin
According to the CEO of Redfin, Glenn Kelman, the housing market is at rock bottom, with little room to get much worse. A combination of high mortgage rates and rising home prices makes buying unaffordable for many. It’s also causing homeowners to stay in their low-interest rate mortgages rather than putting their homes up for sale — that has led to a supply shortage.
As reported by Markets Insider, Kelman noted that the only people moving are those that have to due to a shift in life circumstances, such as marriage or a job change. That’s different from prior housing market crashes, when people sold their properties because of a foreclosure risk.
Kelman foresees the sales slowdown continuing for a long time — past the end of 2024 — and homes continuing to be out of reach for the average consumer.
Intercontinental Exchange
Andy Walden, vice president of enterprise research at Intercontinental Exchange, echoed the concerns of other analysts concerning home price affordability, as reported by Realtor.com. According to Walden, the current housing market is unaffordable with today’s price-to-income ratio of nearly 6-to-1. That’s a sharp contrast to the 1980s, when interest rates went into the double digits but prices were just 3.5 times the average annual income.
To make homes affordable to new buyers, one of three things would need to happen, according to Intercontinental Exchange:
A reduction in 30-year mortgage rates by 4.4%
A 62% increase in average household income
A 38% decrease in home prices.
However, Intercontinental Exchange concluded that even if one of those things occurred, it would be unlikely to completely resolve the current housing market challenges.
When Will Interest Rates Fall?
The elephant in the room — at least in real estate — is interest rates. All four analyst reports cited high interest rates as a significant contributor to unaffordability in the housing market. Great — so when will they go down?
At the beginning of 2024, CME Group predicted a 52% chance of a 0.25% interest rate drop in May 2024, followed by an additional four cuts by year end. However, the Fed held interest rates steady in May, pointing to higher-than-expected inflation.
In his remarks, Fed Chair Jerome Powell stated that additional rate hikes are unlikely in the near term. However, the Fed will need to see evidence of cooling inflation around the 2% level before it begins lowering rates.
Another situation that could lower interest rates is a weakening in the labor market, which could spur an initial cut. However, when asked whether the Fed still projects three rate cuts during the remainder of 2024, Powell did not respond.
What does that mean for the housing market and mortgage interest rates? In short, it’s anyone’s guess. However, there doesn’t appear to be a need for additional rate hikes, which means the market will likely hold steady with elevated home prices and mortgage rates.
Renting Is Cheaper Than Buying
So, what are would-be first-time homebuyers doing in the current market? They’re renting.
Renting is cheaper than buying across 47 major metropolitan areas nationwide, with average rents hovering around $1,750 as of late 2023. An increase in multifamily construction contributes to the lower rental rates.
In comparison, buying a starter home comes with an average monthly mortgage of $2,959 — over 60% higher than renting.
For now, it seems, most future homeowners are better off waiting for conditions to improve than taking on a high-interest mortgage.
Graham Stephan Anticipates the Housing Market Will Stay the Same for Awhile
Based on all the data he reviewed and his real estate investment experience of nearly 20 years, Stephan believes interest rates will stay higher than most people think. That trend will continue longer than many anticipate — at least a few years.
Stephan noted that he hasn’t found much opportunity in the market, and if he were looking for a place to buy in the next two to five years, he’d probably rent instead. From an investment perspective, property returns are too low to warrant a purchase, given that treasuries yield around 5%.
His assessment aligns with those of institutional and other investors, which have over $5.7 trillion parked in cash-like money market funds, most of which yield returns above 5%. However, once interest rates drop, Stephan believes those funds can act as a catalyst, allowing investors to pick up good deals.
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