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The U.S. housing market is heading toward the ‘most significant contraction’ since 2006. Here’s what that means

The housing market is about to slow down — but no, that still doesn’t mean prices are about to spiral

SHARE The U.S. housing market is heading toward the ‘most significant contraction’ since 2006. Here’s what that means
Homes in the Avenues neighborhood of Salt Lake City.

Homes in the Avenues neighborhood of Salt Lake City are pictured on Friday, May 20, 2022.

Laura Seitz, Deseret News

The U.S. housing market is in the early stages of what one national economist says is the biggest slowdown in over 15 years.

But that doesn’t mean housing prices are about to hit a death spiral.

What’s happening: “The U.S. housing market is at the beginning stages of the most significant contraction in activity since 2006,” Len Kiefer, deputy chief economist at Freddie Mac, tweeted Thursday.

“It hasn’t shown up in many data series yet, but mortgage applications are pointing to a large decline over summer,” Kiefer said, noting home purchase applications are down 40% from a peak last year.

A drop in both purchase and refinance applications pushed the Mortgage Bankers Association’s market index down to its “lowest level in 22 years,” the Mortgage Bankers Association reported this week.

Kiefer noted mortgage applications also fell 40% in spring of 2020, in the early days of COVID-19 hitting the U.S. — but they came “roaring back in short order.” The pandemic spurred many Americans to reevaluate their lives, their remote work options, and as a result sent the national housing market into a frenzy.

In today’s environment, as mortgage rates surge and prices remain sky high, “such a rebound is unlikely,” Kiefer tweeted. “But neither is the very very slow recovery we saw in 2011.”

Kiefer noted the U.S.’s average conventional mortgage loan size is now “moderating” after hitting almost $500,000 earlier this year. However, even if loan size is down 8% from its most recent peak, “it’s still up more than 25% from where it was at the beginning of 2020.”

High home prices are leading Americans to seek large loans. That, coupled with over 5% mortgage rates, has “obliterated affordability,” Kiefer said.

Why prices aren’t about to drop: Kiefer told MarketWatch he expects home sales to “slow quite a bit over the summer.”

He noted mortgage application data can offer a window into what might be around the corner “because that’s the early stages of when people are looking to buy a home. And if the volume of applications falls, that tends to indicate that in a month, month and a half, mortgage originations of home closings will also decline.”

But that doesn’t mean a bubble is about to burst like what we saw in 2006.

  • “I don’t think that home sales are going to grind to a complete halt,” Kiefer told MarketWatch. “They’ll just slow. People will still be able to sell homes, but it may take you just a little bit longer than what it’s been.”

Kiefer’s not alone. Other housing experts — nationally and here in Utah — have been saying the same thing. However, Realtor.com has seen a larger share of sellers recently slash their prices in certain areas that some researchers have deemed “overvalued.” And some experts have been eying some of these “overvalued” regional markets, with some more at risk than others for price drops.

Even though the Federal Reserve’s rate hikes and rising mortgage rates may very well temper demand, the U.S. and especially high-growth states in the West, like Utah, have faced a housing shortage that began over a decade ago, amid the Great Recession. That shortage has not only persisted but sharpened, fueling a still highly competitive market.