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The housing market is experiencing a downturn: What does that mean and what should I expect?

Right now, housing prices are high and Americans simply can’t afford to buy a new home.

Housing Market: What is going on?

But, what does that mean for the economy and what should I expect?

What is going on with the housing market?

The majority of the issues in the housing market right now stem from a shortage of affordable housing. You may have heard the term housing crisis recently– but what we are really in the midst of, is an affordability crisis. Part of the reason that houses have become so expensive is because there is a national shortage.

The combination of low interest rates during the pandemic and a decade of under building led to a higher demand than supply. This led home prices to rise dramatically. In the past 20 years, the US has fallen behind by about 5.5 million housing units. When factoring in property destruction due to demolition or natural disasters, the housing shortfall is closer to 6.8 million.

The housing gap is so deep that it will take more than a decade to catch up. But, at this rate, it will not matter if there are more houses to buy or rent if consumers can’t afford them.

Increased housing costs have also been a driving force behind inflation. For most people, housing is their biggest expense. Stubborn inflation rates means that the Federal Reserve will be taking additional action in an attempt to reduce inflation.

During the pandemic, cities like Phoenix and Austin saw the largest price increase for homes. In Miami, the price of a home is up 33% since last year and rent is up 26%. However, the affordability crisis is a national event.

Will the Federal Reserve crash the housing market?

In attempts to combat inflation, the Fed has been aggressively raising interest rates. Investors are concerned that these hikes could damage the economy. This is especially a concern in the housing market.

Even with the rate hikes, housing prices are remaining high. The Fed plans to increase rates even further. However, nine of the last twelve recessions were preceded by a housing slowdown. In the coming months, the Fed will have to make tough financial decisions about more rate hikes and the risk of crashing the economy.

3 things to expect as we enter a housing downturn

In the past two years, residential real estate has spiked 43%. Data from August is sufficient evidence that the market has moved past the first stage of a market downturn. The first stage is a sharp drop in housing activity, which we saw in August. The second stage is falling home prices. Here are three things to expect:

  1. Correction of home prices is spreading.
    • This year alone mortgage rates rose from 3.2% to 6.3%. The increase was sue to the intense slow down of activity on the housing market. Based on data collected from 148 regional housing markets– 98 housing markets have seen home values fall from their 2022 peaks. Only 50 markets are still at their peak. 11 markets have already dropped by more than 5%. This trend of price correction should continue and peak in 2023.
  2. The housing downturn will spread beyond housing.
    • Right now, the housing market is taking most of the hits as the economy takes a downturn. Researchers at Goldman Sachs predict that prices will drop by 8.9% in 2022 and another 9.2% in 2023. According to that prediction, the downturn of the economy would impact everything else more too.
  3. Decrease in new listings
    • On, active listings increased by 106,900 homes in May. In June, there was another jump of 102,900 and 128,000 in July. However, that began to slow dramatically in August. There are predictions that there will continually be less homes available.

Most overvalued cities may see prices drop

As the housing downturn pushes forward, housing experts and economists are watching home prices dip across the country. Some reports have found that there are 210 housing markets nationwide that are “significantly overvalued.” Anything 25% over value is considered significantly overvalued. House prices are expected to fall 5-10% in 2023. That prediction increases to 15-20% if the US enters a recession.

Many of the overvalued markets are in the west. Here are some of the top overvalued markets:


  • Boise: overvalued by 76.9% with potential price declines up to 20%.
  • Coeur d’Alene: estimated to be overvalued by 62.6%.
  • Idaho Falls, Pocatello and Twin Falls: estimates for percent overvalued for each of these areas– 57%, 59%, 52%.


  • Phoenix: considered the poster child for the pandemic housing boom and will be among the first of the areas to see prices fall. It is currently overvalued 57%.
  • Flagstaff: 65% overvalue.
  • The Lake Havasu City-Kingman: estimated 60% over.
  • Prescott Valley: estimated 51% over.
  • Tucson: estimated 34% over.


  • The Ogden-Clearfield area: most overvalued area in Utah, over 50%.
  • Logan: overvalued by 44%.
  • Salt Lake City: estimated to be 28% overvalued.
  • St. George: estimated 27% over.
  • The Provo-Orem metro area: estimated to be overvalued by 17%.

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