A ‘No-Bust’ Scenario for National House Prices
Affordability across the nation improved by 4.4% annually in May, driven by falling mortgage rates, slowing nominal house prices, and rising household incomes. Preliminary national data from June and July indicates affordability has continued to improve, reaching a level last seen in October 2024 and marking a 10% increase in affordability from the recent low point in October 2023. Although affordability remains historically low, the modest rebound is encouraging for potential buyers.
The improvement in affordability is partly due to the deceleration of house prices. Nominal house price growth has slowed to single digits and, in May, prices declined or price growth was under 1% in nearly half of the 50 markets we monitor. With memories of the double-digit house price declines during the Global Financial Crisis still fresh for many, it’s easy to understand why some believe today’s housing market may be on the cusp of a potential house price crash. However, today’s housing market is markedly different than the one that preceded the GFC. And, while real estate markets tend to move in cycles, not every housing boom ends in a housing bust.
This Time is Different…Really
A housing bubble occurs when home prices and construction surge due to artificial demand, such as speculative behavior or lax loan underwriting standards. The housing market played a pivotal role in the GFC. Charting house prices over time shows two significant price spikes—one during the mid-2000s that preceded the GFC and another during the pandemic. The economic pain of the GFC and steep declines in house prices left enduring scars for many, and there’s a natural inclination to expect a similar outcome for today’s housing market following the pandemic boom.
However, the characteristics of the current housing market cycle differ significantly from the previous housing boom:
• Artificial Demand vs. Supply Squeeze: The price appreciation in the housing market during the mid-2000s was driven by a surge in demand due to wider access to mortgage financing. Teaser rates, fixed-to-ARM loan structures, and other financial products allowed borrowers to secure larger loans at the same monthly payments, which boosted demand and, in turn, fueled surging home values.
In contrast, price appreciation in the pandemic boom was driven by a shortage of supply and a release of pent-up demand. Amid the tight inventory levels, Millennials–the largest generation in history–entered their prime home-buying years. This wave of millennial home buyers were armed with record-low mortgage rates and the new-found freedom to work remotely, spurring demand and price appreciation during the pandemic era, a very different set of conditions than the housing boom housing boom that peaked in 2006.
• We Didn’t Build it, and People Still Came: The housing sector has been underbuilt for over a decade, leading to a structural housing shortage. Since 2009, annual household growth has consistently exceeded new housing units added, whereas before 2009, the amount of new housing units added per year exceeded annual household growth. This cumulative supply-demand gap created the perfect story for rapid house price appreciation during the pandemic boom years. Although inventory has increased this year, helping soften house prices, it remains below historical levels, especially in some regions such as the Northeast and Midwest.
• Don’t Forget the Equity: While equity dipped slightly in the third and fourth quarters of 2024 and the first quarter of 2025, it remains near historical highs, down only 3% from the peak reached in the second quarter of 2024. Large equity buffers help homeowners withstand financial challenges. During the GFC, the housing crisis was exacerbated by job losses and a significant share of homeowners lacking equity in their homes. Currently, homeowners have substantial levels of tappable home equity, providing a cushion against potential price declines and reducing the risk that housing distress will lead to foreclosure. If distressed homeowners need to resolve delinquency, their equity buffers make involuntary sales more likely than foreclosures. Additionally, the national loan-to-value ratio is just 28%, below the pre-pandemic five-year average and well below the level of approximately 50% in 2008, indicating a healthier financial environment.
• Loan and Borrower Quality Matters: Today’s housing market is characterized by stronger borrower profiles and more conservative loan structures than those leading up to the GFC. On the loan side, risky products, like negatively amortizing loans or no-document mortgages are far less common today. Mortgage credit availability remains constrained, indicating that it’s still harder to qualify for a mortgage than during the pre-pandemic period, according to the Urban Institute’s Housing Credit Availability Index. The Urban Institute report indicates that tighter credit standards from the third quarter to the fourth quarter of 2024 reflect a decline in default risk. The median credit score of borrowers approved for mortgages reached 772 in the first quarter of 2025. While this is lower than the pandemic-era highs, it is higher than the early 2000s.
Not all Housing Booms End in a Housing Bust
In today’s environment of elevated mortgage rates and economic uncertainty, buyers are pulling back and sellers are adjusting their price expectations, so house prices naturally are softening. However, the structural shortage of supply relative to demand will put a floor on how low prices can go. While there will be significant regional variation, the underlying fundamental conditions of the national housing market support a natural moderation of house prices rather than a sharp decline.
(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)
