Will There Be a Housing Market Correction? 10 Things to Consider

After nearly two years of double-digit home price growth and the stock market seesawing into correction territory, many are wondering whether the housing market is next in line for a market correction.

While our economy is certainly facing a number of unique challenges that could impact housing prices and demand moving forward, these 10 considerations help illustrate the case for and against a real estate market correction.

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After the Great Recession and excess home supply left homebuilders in the red, homebuilders put a pause on new housing starts. In 2009, ​​there were only 353,000 new homes developed. This trend continued for the next decade, creating a national shortage of housing units today. It's estimated that five million homes are needed to meet current population needs and demand.

ALSO READ: Will 2022 Be a Good Time to Buy New Construction?

In 2021, total housing starts, which includes that first stage of development for newly constructed single-family and multifamily properties, grew 15.6% year over year to a record 1.6 million housing units. While an impressive gain, it's nowhere near filling the gap with today's shortage.

Estimates for February 2022, according to the US Census Bureau and Department of Urban Housing and Development, are at 1.76 million, a 14.3% increase from February 2021. This would need to continue for several years before being able to bridge the gap, assuming no change in population or demand occurs.

Supply chain disruptions -- including limited production, delayed delivery, and higher costs for products necessary to housing development -- have impaired how quickly and how many new housing units are being produced. As global tensions continue to impact supply chain production, this trend of shortages, delays, and increased costs will likely impact home deliveries moving forward.

ALSO READ: How Are Supply Chain Issues Affecting Homebuilders?

As of January 2022, the national average supply of homes was 1.2 months, far below the ideal average of a five-month supply of homes and even below the recent record low of 1.9 in May of 2021. Newly listed homes in January were 9.1% lower than 2021 and 16.8% lower than pre-pandemic levels.

Ideally, this number would be increasing, indicating a more balanced market. Instead, it seems fewer people are selling their homes right now -- not great news for a supply-strapped market.

Multifamily housing units can help fill the gap for those who may not be ready or able to afford to buy today, but even rental supply is strapped. Multifamily absorption, or the rate at which new developments have been absorbed by the market, reached a record level in 2021.

Vacancy rates are the lowest in history at 2.5%, and the national average rental increase for multifamily properties grew by 13.4%. Demand for housing units across the board is outpaced by demand, signs both home values and rental rates should keep climbing.

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Now that national moratoriums have ended, borrowers who may have fallen behind on mortgage payments are no longer protected from foreclosure. Attom Data Solutions, which tracks mortgage delinquencies and foreclosure starts on a national level, believes we should see double-digit growth for foreclosures for the next year.

February 2022 saw an 11% increase from January 2022 foreclosure-start levels. An increase in the number of foreclosed homes means there could be more inventory in the market soon, which could help cool home price growth.

ALSO READ: Foreclosures Soar 94% From 1 Year Ago

The Federal Reserve has been very open about its intent to increase interest rates to combat inflation. While the first increase got pushed back, experts estimate we could see as many as two to six interest rate hikes in 2022.

An increase in interest rates affects mortgage rates, which right now sit near historic lows. The more expensive it is to borrow money to purchase things like a home, the more likely fewer people will buy.

Inflation is sitting at 7.9% and rising. Costs for energy are over 25% higher than in years past, while food and other goods and services are getting more expensive by the minute. When inflation is high, spending is restricted because the average wage can't afford what it once could.

That means more and more Americans will be faced with a tightening budget and restricted spending, which can definitely impact the number of buyers in the market.

ALSO READ: Inflation Reached 7.5% in January, Hitting a New 40-Year High

If you own a home right now, it likely means you probably have some equity in your property because of the rapid home price growth we've experienced in the last few years.

The challenge, though, is that if you sell your property to recapture this newfound equity, you're left having to find a new place to live at today's high prices. High home prices mean more home sellers are staying put using equity lines of credit rather than selling their home to tap into its equity.

ALSO READ: Could Housing Affordability Cause the Next Housing Crash?

In addition to the current housing shortage, a major crisis for the United States is a lack of affordable housing. With inflation rising rapidly, home prices appreciating at double-digit rates, interest rates increasing, and wages falling stagnant, there are a lot of reasons today's market is out of control.

There will likely be a tipping point when buyers simply can't afford homes anymore, reducing the prospective buyer market, lowering demand, and potentially helping cool the housing market.

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Given today's current housing shortage, a real estate market correction likely isn't on the horizon -- at least not anytime soon. Until inventory increases to better meet demand, real estate prices will continue soaring.

There are many mounting factors that could cause the market to correct in the future, but if, when, and to what extent are still unknown. Prospective buyers should prepare for another competitive market fueled by low supply, but hopefully, things will start to cool toward the end of the year and into 2023 and beyond.

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