The Market Likely Isn’t Headed for a Crash

The Market Likely Isn’t Headed for a Crash…
Let’s take a look at Inventory,
New Builds, Expected Population Growth, & Rental Options

The housing market is slow in August, but August has been the slowest month of the year in recent years in this area. Is the market really headed for a crash? Whether or not you owned a home in 2008, you likely remember the housing crash that took place back then. News about an economic slowdown happening today may bring all those concerns back to the surface. While those feelings are understandable, here is some data to reassure you the situation today is nothing like it was in 2008.
One of the key reasons why the market won’t crash this time is the current undersupply of inventory. Housing supply comes from three key places:

• Current homeowners putting their homes up for sale
• Newly built homes coming onto the market
• Distressed properties (short sales or foreclosures)

For the market to crash, you’d have to make a case for an oversupply of inventory headed to the market, and the numbers nationally just don’t support that. So, here’s a deeper look at where inventory is coming from today to help show why the housing market isn’t headed for a crash.

Even though housing supply is increasing this year, there’s still a limited number of existing homes available. The graph below helps illustrate this point. Based on the latest weekly data, inventory is up 27.8% compared to the same week last year (shown in blue). But compared to the same week in 2019 (shown in the larger red bar), it’s still down by 42.6%.

So, what does this mean? Inventory is still historically low. There simply aren’t enough homes on the market to cause prices to crash. There would need to be a flood of people getting ready to sell their houses in order to tip the scales toward a buyers’ market. And that level of activity simply isn’t there.

For example, as of July there was only 1.2 months of supply in July in Northern Virginia (see the graph below)! For context, six months of supply is considered a balanced housing market! So there is still a substantial shortage here.

Newly Built Homes 
There’s also a lot of talk about newly built homes today, which may make people wonder about overbuilding. But home builders are actually slowing down their production right now. Ali Wolf, Chief Economist at Zonda, notes:
However, to avoid repeating the overbuilding that happened leading up to the housing crisis, builders are reacting to higher mortgage rates and softening buyer demand by slowing down their work. It’s a sign they’re being intentional about not overbuilding homes like they did during the bubble. And according to the latest data from the U.S. Census, at today’s current pace, 1.4 million homes will be built this year. While this will add more inventory to the market, it’s not on pace to create an oversupply because builders today are more cautious than the last time, when they built more homes than the market could absorb. For example, developers such as Toll Brothers, NV Homes have been executing a strategy of selling before starting construction, and only releasing a handful of units at a time.

Distressed Properties (Short Sales or Foreclosures) 
The last place inventory can come from is distressed properties, including short sales and foreclosures. Back during the housing crisis, there was a flood of foreclosures due to lending standards that allowed many people to secure home loans they couldn’t truly afford and many financed with an adjustable interest rate. Today, lending standards are much tighter, resulting in more qualified buyers and far fewer foreclosures. The graph below uses data from ATTOM Data Solutions on properties with foreclosure filings to help paint the picture of how things have changed since the crash:

This graph shows how in the time around the housing crash there were over one million foreclosure filings per year. As lending standards tightened since then, foreclosure activity started to decline. And in 2020 and 2021, the forbearance program was a further aid to help prevent a repeat of the wave of foreclosures we saw back around 2008. That program was a game changer, giving homeowners options they didn’t have, such as loan deferrals and modifications.  Data on the program shows that four out of every five homeowners coming out of forbearance are current on their loans.

Meanwhile, fixed mortgage rates have been low until recent mortgage interest rate jumps, and buyers have opted for longer term fixed rate mortgages as opposed to the shorter-term adjustable rate mortgages in the years before 2008.
These are a few of the biggest reasons there won’t be a wave of foreclosures coming to the market.
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In short, although housing supply has grown in the recent months, the inventory level is not anywhere near the level that would cause prices to drop significantly that signal a housing market crash.

Other factors affecting housing inventory

Population and Home Units 
Citing 2020 U.S. Census data, the Metropolitan Washington Council of Governments published a report in Nov. 2021, highlighting which areas of the Washington Metropolitan region grew the most in terms of population, race and ethnicity over the previous decade. The region’s total population grew 13%, a little over 660,000 people, with Northern Virginia (especially) and suburban Maryland seeing the most growth, as well as increased racial and ethnic diversity.

According to the report, the Washington Metropolitan region totaled 5,707,518 people as of April 1, 2020. Fairfax County (1,150,309) was the most populous jurisdiction, followed by Montgomery County, Md. (1,062,061), and Prince George’s County, Md. (967,201). Loudon County experienced the most dramatic population spike of any jurisdiction, increasing by 35% (+108,648) between 2010 and 2020.

Northern Virginia localities should expect moderate levels of jobs growth in the coming two decades, with the metropolitan area as a whole adding perhaps 880,000 new jobs by 2045, according to figures from the Metropolitan Washington Council of Governments (2021), these figures also estimate that the region’s overall population will essentially be on par with job growth – the population is expected to reach just under one million by 2045. During this 23-year period, employment is slated to rise 27 percent in both Arlington and Fairfax counties, with only slightly lower rates of growth in the District of Columbia (24%) and Alexandria (23%), but higher growth rates in the outer suburbs of Loudoun (37%) and Prince William (56%) counties.

In terms of household growth (which is similar, but not identical, to population growth), Arlington is expected to see a population increase of 29.4 percent by 2024, according to current estimates, with Alexandria up 37 percent and Falls Church up a whopping 77 percent. Those figures seem to suggest that communities that already are somewhat urbanized (in the case of Falls Church, seemingly on the road to urbanization), will continue to see additional housing shortage.

In the outer suburbs, the number of households, is expected to rise 31 percent in both Loudoun and Prince William counties, which still have large undeveloped tracts that may be suitable for new housing.

In Fairfax County, which serves as a buffer between urbanizing Arlington/Alexandria on one hand and more suburban/rural Loudoun and Prince William counties on the other, the growth rate for households is expected to be 25 percent during the period.
The question becomes whether there will be enough available home units (new and resale; for rent and for sale) to satisfy this growth rate of population in this area?

Rental Market and Rising Rent 

Additionally, rental prices have increased quite significantly from last year (see graph below showing 10%-15% increases in Arlington, Fairfax and Loudoun Counties). Therefore, despite higher interest rates, people searching homes are still considering buying rather than renting.