In Part 1 of our series on housing crash fears, we spoke to Lisa Sturtevant, chief economist at Bright MLS, who explained to Inman that the market is entering a gradual correction, rather than a crash like 2008.
Today we’re talking with Ricky Carruth, Chief Housing Analyst at RLTYco. Like everyone I spoke to in this series, Carruth emphasized that a housing crisis is not imminent for several reasons.
ricky carruth
But Carruth also had something interesting to say about why the current housing market downturn could lead to a market boom over the next decade.
Doomers are nothing new
Carruth didn’t pull any punches as to why stories about the housing market crash have spread recently. “I think a lot of people are praying that it doesn’t happen,” Carruth told Inman. “Buyers want a crash, sellers don’t. But there are probably more people who are hoping for a crash right now.”
Of course, the phenomenon of “doomers” warning of crashes is not new.
Throughout history, each major business cycle has produced its fair share of pessimists who warn of impending collapse. From Tulipmania and the South Sea Bubble to the Wall Street Crash of 1929, skeptics have consistently criticized unsustainable market conditions.
As depicted in Michael Lewis’ 2010 book, The Big Short, a small group of analysts accurately predicted the 2008 financial crisis. But for every accurate prediction, many others were either premature or completely off the mark.
Part of the reason is that markets are cyclical. Economic booms lead to scrutiny, and the possibility of a recession constantly leads to bearish forecasts. In today’s hyper-connected media environment, these predictions travel faster and further, driven by social media platforms where worst-case scenarios tend to outshine more in-depth analysis.
Carruth said this long-standing sentiment has recently fueled a wave of dire predictions on social media and YouTube for 2022 and beyond, with some commentators predicting a sharp decline in home prices nationwide. Carruth cited recent claims, including the high-profile prediction that home prices will fall 50% by 2026, as examples of theories that are gaining traction despite being contradicted by current market data.
Stronger fundamentals than in 2008
Carruth argues that comparisons to the 2008 housing crash overlook a fundamental change in the way mortgages are underwritten today. “Dodd-Frank changed everything,” he said. “Lending standards have become much more stringent. The average credit score for today’s homeowners is much higher than it was back then. Today’s buyers are often overqualified.”
This tightening, combined with historically high levels of homeowner equity, has created a cushion against the widespread distress that characterized the previous crash.
“I can’t imagine a scenario where home prices would collapse dramatically,” Carruth said. “Back in 2008, homeowners didn’t have any equity. Now they have a lot of equity.”
Even if a widespread recession were to occur, Carruth expects the impact on housing would be limited. “Even if we go into a recession, it doesn’t necessarily mean that housing will collapse,” he said. “We’ll probably just put it back in stock.”
A slowdown in trading, not a price collapse
While Carruth rejects the idea of a collapse in prices, he acknowledges that the market is under pressure in other ways. “We’re not seeing a collapse in prices, but we’re in a collapse in transactions,” he said, pointing to affordability constraints, rising mortgage rates and broader economic uncertainty.
He said concerns about the impact of artificial intelligence on jobs and geopolitical instability, including the Iran war, have caused buyer hesitation in recent months.
Although these pressures have slowed activity, Carruth argues that historically home prices have adjusted just enough to maintain baseline levels of sales. “Even during the housing recession, the number of existing homes sold in the U.S. never fell below about 4 million a year,” he said. “Prices will be adjusted to what is needed to achieve that number.”
That doesn’t necessarily mean a sharp decline. He added: “That could mean a plateau. Some markets are down. But it’s a correction, not a crash.” “There’s a big difference.”
“Demand is getting stuck.”
Carruth said that for a true housing collapse to occur, several conditions must occur simultaneously, but those conditions do not currently exist. “There will be a lot of foreclosures, forced sellers and no buyers,” he says. “That’s not the reality right now.”
Rather, markets are shaped by supply constraints and demand lags. “Even if demand goes down, demand will increase, not disappear,” he said. “It’s like turning off a faucet. When you turn it on again, the pressure is even stronger.”
Demographics are also playing a role. Carruth pointed to the large Gen Z buyer group, who are in their prime homebuying years, as a key driver of long-term demand.
Experts estimate demand for pent-up housing by comparing the current household headship rate (the percentage of people who form their own household) for Millennials and Gen Z to the household rate for similar age groups from 2010 to 2014.
The difference between today’s interest rates and the previous benchmark indicates a significant shortfall. Approximately 1.82 million households that would have existed under previous conditions were never formed due to limited inventory and worsening affordability.
In other words, there are nearly 2 million “missing” households among the 18-44 age group compared to what demographic trends would normally produce.
“More people in their 30s than ever want to own a home,” he says. “That demand is pent up.”
Interest rates, geopolitics, and the way forward
Recent changes in mortgage rates have added further uncertainty. Carruth said the housing market began to regain momentum earlier this year as interest rates fell, but progress was hampered by geopolitical developments.
“The war in Iran has made things much worse,” he said. “Interest rates had been falling, but have risen again in the wake of escalating conflict and weak employment data.”
Still, he sees the disruption as temporary rather than structural. “I sincerely hope that this war in Iran ends soon. If it ends, we will be in a very good place,” Carous said.
Looking further ahead, Carruth predicts the housing market will expand over the next decade, even as the industry itself undergoes transformation. “The next 10 years are going to be historic,” he said. “Thanks to technology and AI, there will be fewer agents, but more transactions and higher prices.”
This change will concentrate opportunities for top performers, he added. “The top 10% of agents will earn more than ever before,” Carruth said.
Email Nick Pipitone
