Have Housing Prices Reached Their Tipping Point?

We've experienced many highs and lows in the real estate market in recent years - it's been somewhat of a rollercoaster. Since the housing market has been climbing the proverbial "hill" for a while now, it makes sense to ask the question: Are housing prices at their tipping point?

I’m certainly no expert on the matter, but it seems unlikely that housing prices are ready to take a tumble, according to go the Shiller-sourced 1950-2024 Housing Price summary (see below).

Correlating Calamaties

During the 75-year period represented in this summary, there were only seven down years nationally - and those years happened to coincide with a couple of widespread financial calamities:

• The first was the 1990-1991 Savings & Loan Crisis whereby numerous S&Ls holding risky commercial real estate loans were caught in a rising interest rate environment that found them paying higher rates on deposits than they were collecting on fixed-rate loans. Nearly a third of over 3,200 S&Ls in the U.S. failed.

• The next declining price period was the Great Recession of 2007-2011, triggered by the industry-induced 2006 housing bubble (more specifically, a toxic mix of predatory mortgage lending, unregulated markets, and a massive amount of consumer debt). That bubble burst when an avalanche of subprime mortgage holders – 25% with credit scores of less than 660 – failed to meet their obligations. Even the companion 25% of mortgage holders with credit scores of 760 or higher couldn’t stem the tide. And for the next five years U. S.  housing prices suffered a cumulative 28.7% decline.

The moral of this 75-year story is that America’s housing prices are amazingly resilient over time - when not disrupted by risky financial market exploitations. An indication of this resilience is a recent 45% cumulative rise in national home prices (2022-2024) in the face of accelerating mortgage rates, low used-home inventories, and the resultant “affordability” issue.

Head-Scratching Stats

It’s hard to rationalize why home values haven’t suffered negative numbers in light of current high mortgage rates and prices. Not to mention what kind of impact Trump’s tariffs might have on the housing industry. But declining values are not the case for now. Of note, contra to the 2006 bubble that sparked the Great Recession, over two-thirds of today’s approved mortgages go to borrowers with 760 or better credit scores. And those higher risk subprime borrowers comprise less than 8% of the total.

On average, today’s borrowers are in relatively good shape versus the 2006 crowd, notwithstanding the fact that the recently departed administration attempted to mask problems in the housing market by waiving and/or reducing mortgage payments.

Short of another major financial policy snafu (Trump’s current ever-changing tariff strategy might soon qualify) what are some normal marketplace events that could precipitate a fall in U. S. home prices? If those fortunate homeowners holding 3% mortgages keep refusing to sell, might America’s homebuilders be induced to supply more new shelters? A larger new home inventory would offer prospective buyers more negotiating power and could result in enhanced affordability. Conversely, the absence of increased new construction might well create an even more unaffordable market for lack of demand – a powerful instrument in bringing down prices.

Market Stability

Based on the 1950-2024 summary above, U.S. housing prices have remained quite stable over time. Until and if builders decide to flood the market with more housing, a sustained period of falling prices seems unlikely, particularly in light of a lurking demographic of “priced-out” young folks who remain potential buyers in an elusive unaffordable market.

There is a long list of variables that determine the demand for homes, and one major factor is geography. Residential real estate markets are local. Location, location, location is ever the mantra. Because inventories have increased in the east and west coast regions and in the midwest, those areas appear to be slowly advancing toward buyers’ markets. Unfortunately, those are the very regions where massive price gains occurred during the pandemic boom (along with significant insurance and property tax costs). Thus, affordability remains a problem despite significant gains in inventory.

And to beat a dead horse, the current administration’s ever-changing tariff policies are adding angst in the housing market. Tariffs could have multiple impacts on its various participants – buyers, sellers, builders and mortgage brokers – as they prepare for even more pressing affordability issues. Import taxes could further limit the supply of housing, driving up the cost of wood, plastics, glass, metals etc., raising the cost of new construction, and increasing renovation costs on items such as appliances, fixtures, cabinetry, and glass. In turn, this could put upward pressure on mortgage rates, making it harder to close deals.

In Sum

Housing prices occasionally retreat but that is more often not the case and current conditions indicate “not likely” in the very near term, ignoring for a moment the tariff issue. The best case might well be a stagnating market until incomes and/or falling mortgage rates scale the affordability wall (assuming those factors themselves don’t increase demand).