Dave Meyer:
Is the real estate market going to crash? Every day, there’s a new headline screaming that it will, but people have also been saying that since 2012, that home prices are about to free fall and it hasn’t actually happened yet. So this is all confusing. And if you’re a real estate investor, it’s pretty important to know what’s real and what’s fake news. So I got you. I studied the housing market and today’s episode, I’m going to give you my opinion about a potential crash. And I’m also going to explain to you the data and the math behind a crash, because believe it or not, there are a few key indicators that can tell us if a housing crash is imminent. They predicted the crisis in 2008, and I’ve gathered all that data and will share what they’re saying today. So if you want to make sure you’re not buying a new property right before the crash or just not sure what to believe, keep watching.
These are the few key numbers that can foreshadow exactly what’s about to happen.
Hey everyone, welcome to the BiggerPockets Podcast. I am Dave Meyer. In addition to being an investor for 16 years now, I’m also an analyst. That was actually my first job at BiggerPockets. I have a graduate degree in data analytics, and I’m going to be honest, I really like doing this stuff. Spreadsheets are actually fun for me. I am one of those rare people, believe it or not. And for the last 10 years or so, I’ve focused my energy as an analyst on the housing market. And a big part of this effort of understanding what’s happening in the market is to calibrate and understand risk. For anyone who lived through the great financial crisis, the fear of another genuine housing crash is always on the mind. So from both an analytical perspective and because I own real estate, I don’t want to lose my shirt and therefore I spend a lot of time thinking about a potential crash.
And today I’m going to share with you what I know. I’ll give you my honest opinion at the end, but I also just want to show you all why I think the things I do, what indicators and data we can look at to get clues about the future of housing prices and what is likely to happen next. This is Real Estate Crash Math. Let’s get into it. First up, let’s just talk about the mechanics of a crash because it sounds like this big mysterious thing, but we can actually understand in real math and real economic theory how a crash actually happens. We’re going to do a little explainer of Econ 101. Prices in a market like what we have in the United States are determined by supply and demand. People probably know this and most of the time when you’re in a “normal time” for the housing market or really any other market, things are usually in relative balance and markets are stable.
Prices go up a little bit in one direction or the other. Total quantity or the volumes of homes sold in any given month go up and down a little bit, but they’re usually pretty predictable. But crashes can happen. They do obviously happen and they do when either supply or demand or both get a little bit out of whack. And specifically when prices go down and we see a crash, it happens with either a big increase in supply. So for housing, that’s way more houses getting listed on the market and sitting on the market. We measure these things through new listings and inventory in the housing market, but that’s a big increase in supply. The other thing that could happen is big decreases in demand when far fewer people want to buy a home. You could also see both. You could see increasing supply at the same time as you see decreasing demand.
And when any of these combinations happen, either huge increases in supply, big decreases in demand or modest changes in both supply and demand, prices can fall and they can fall really quickly. That’s a crash. This is exactly what happened in 2008. So in our conversation today, we need to frame it through this lens because a lot of people talk about crashes and they’re like, “It’s just too expensive and that is a factor in whether or not a crash is going to happen.” But ultimately, if a crash is going to happen, we will need to see these mechanics actually play out in the market. Will we see increasing supply? Will there be less demand? Those are the questions we have to answer for ourselves. And luckily, we have data to look at all of this. First up, we’re going to look at the demand side, which is again the buyer side.
Basically how many people are looking to buy homes? And this is a popular refrain that I hear all the time on social media that there are no buyers, that affordability in the housing market is terrible, and therefore the market is going to crash. And again, if there truly were no buyers in the housing market, of course the housing market would crash, but that’s not actually what’s happening as we approach the end of 2026. There’s actually a lot more nuance. So let’s actually dig into the data and talk about what’s going on. First, I like to look at something called pending sales. This is a great measure of what’s happening in the market because it’s the actual number of people that go out, sign a contract and intend to buy a home. This is real transactions happening. And recently we’ve seen some interesting moves in what’s going on in pending sales.
For the first half of the year, pending sales were doing just fine, but in the last couple of months, August, September, October, we’ve actually seen a pretty significant decline in pending sales, which tells us that demand is starting to go down. Now it is not in free fall, but we did see some significant numbers. It did go down in September, 11% year over year and 7% month over month. That’s a significant change, especially when you consider just that home transaction volume, the number of people buying homes was already low. So seeing it lower is concerning. And the other part about it that’s just kind of frustrating and a little bit disappointing is that in the beginning half the year, demand was up. We were seeing pending sales go up and that was encouraging and we were starting to get into better territory for the housing market.
But after the war in Iran started and mortgage rates started to go up, we have seen a reversal. So that is one way to look at demand. And I just want to call out that right now we only have a month or two of data. So if we start seeing month over month declines of pending sales at 7% again every month, that’s going to be a concern. That is something that could lead to a crash. But right now we see that it went down 7% month over month, and we also have some other data suggests that it’s not going to free fall. So there’s this other data set that we use to measure demand. It’s called the Purchase Demand Index. It’s put out by the Mortgage Bankers Association, but it basically measures how many people are applying to get a mortgage for a new home.
This isn’t refinancing, it’s just going out and buying a new home. And although that has fallen in recent months, it’s actually started to go back up. Just the last couple of weeks, mortgage rates have fallen and we’re seeing people jump back into the market. And that is encouraging to me. There is some fear when you start to see these things that people are really going to get nervous and they’re going to permanently leave the market. But instead, what we’re seeing is that people are just super mortgage rate sensitive, which makes sense, right? So now that we’re seeing mortgage rates back down in the low sevens instead of the high sevens, people are jumping back in. So to me, at this point, that doesn’t suggest we’re going to see pending sales fall every single month. And instead, we’re most likely going to see, yes, lower pending sales and lower demand than we had a year ago and maybe than we had in the first half of 2026.
But as of right now, there’s no reason to think that it’s going to just free fall and the bottom’s going to fall out. So given all that, the question that we have to ask ourselves is yeah, demand has gone down and it was already pretty low and it’s gone down a little bit more if that is going to lead to a crash. And I would say as of right now, the answer to that is no. And I know a lot of people are out there saying demand is already low, it went lower, that’s a reason for a crash. But that is not true because you can’t just take demand on its own and then predict a crash. You have to look at the balance between supply and demand. That is what matters. It is not the absolute amount of demand that matters. When you are looking at prices, if demand and supply stay in proportion to each other, even if they’re both low, prices can stay the same or more likely in the scenario they can go down but not crash.
And because demand is down a little bit, we need to see and ask ourselves, is supply also going to come down a little bit or what’s going on in the supply side of the equation? And so yeah, demand is weaker and there is a risk. I’m not saying that there is no risk here. Demand has gotten worse and that introduces new risk to the market, something that we need to keep an eye on. But if you’re asking here today as I’m recording this, is demand bad enough that a crash is imminent? I would say no. Now we should ask ourselves, could that change? Because of course it can, right?This stuff is always changing. The episode I’m recording is a point in time. And so there’s basically two risks that can change this and make it way worse. The first is probably obvious, but that’s just mortgage rates going up even higher.
They’ve been moving back down in the last couple of weeks, but if they went up to 8%, 9%, yeah, I think that’s serious risk. That gets us to maybe, I don’t know if it’s crash territory, but could we see five, 10% declines in home prices next year if we got to 9% mortgage rates? Yeah, we could. That world is possible. But as of right now, the bond market has stabilized a bit. We’ve seen mortgage rates go down a little bit. And so again, is that imminent? No, it doesn’t look like it. The other risk though is the labor market because we all hear the crazy negative scary things about AI stealing everyone’s jobs. And next year, instead of me, you could be hearing a robot host this podcast instead. And there’s risk, right? We don’t really know. These AI companies, their business model is kind of to cause mass unemployment.
And so we have to see if that’s going to come to fruition. And if we see unemployment go up to six, seven, 8%, then yeah, I do think we could see demand erode. That is a big risk, but that is speculation. Unemployment has fluctuated a bit over the last couple years, but still in the low fours, which for context is still very low. And so unless that changes and go up a lot, again, I don’t see imminent risk, but these are things to watch for. These are the things that I will continue to update you on on the show is if mortgage rates go higher, if labor market starts to crack, that could really take us into more dangerous territory. But as of right now, it doesn’t look like that’s coming in the next couple of months at least. And anything beyond that, we’re just speculating about what could happen.
The evidence does not support that that is happening. All right, so again, demand gotten worse, but not in a free fall, at least that we know of right now. We’ll keep an eye on that. But what about the supply side? Because again, either changes to supply or demand could put us into a crash and we need to look at the balance. This is the really important thing is looking at the combination of both and we know what’s going on with demand. We will look at the supply side right after this quick break. Stick with us.
Welcome back to the BiggerPockets Podcast. Today on the show, we’re doing crash map. We’re looking at the mechanics of how a crash actually works and not just fear mongering, not just saying things are going great. We’re going to look at the actual economics behind this. How do supply and demand look in the housing market? And then we can assess really what level of risk there is in the market. So we need to turn to the supply side now. And for that, we look at a couple of different data sets, but the two most important in my opinion are inventory and new listings. Inventory is just a measure of how many homes are for sale at any given point in the market. And that is super helpful because it is a measure of supply and demand at the same time. When inventory is going up, it means there is more supply than demand.
When inventory is going down, it is the opposite. And you can imagine why this is true, right? Because if inventory is going up, that means more homes are sitting on the market and people aren’t scooping them up and buying them. Right now, what we see is that inventory actually hasn’t gone up that much. So if you just look at where we are this year compared to last year, it’s surprisingly kind of flat, but I think it’s going to go up. Again, I am speculating. My job as a data analyst is to look at the data, figure out where things are trending, and my guess is that it is going to go up. Now, there are a couple reasons for this. First and foremost, inventory going up is something that we’ve been hoping for for years. So just keep that in mind, is that during the pandemic we had these artificially low levels of inventory and some reversion back to normal levels of inventory was inevitable.
We were already seeing that when mortgage rates were going down that the lock and effect was starting to break and people are starting to list their homes for sale more and more, and that’s good. I was happy about that. That gets us to a more balanced and a healthier housing market. But what I think is going to happen now is two different things with inventory, and it’s important to understand the distinctions here. First is that new listings are going to go down. Now, there’s two ways to measure inventory and supply on the housing market, and new listings is one of them. This is people who put their home or property on the market for the first time in a given month. The other one is active inventory. That’s the total amount of properties that are for sale at any given time. And so the first one just measures new properties.
The second one, active inventory, measures new properties plus all of the old properties that haven’t sold. And so what I see happening here with inventory is that new listings actually starting to go down. And I predicted this a couple months ago because when mortgage rate goes up, that lock-in effect that we’ve been talking about where sellers don’t want to sell because they have these amazing low mortgages that they don’t want to get rid of, that lock-in effect gets stronger, right? They have less of an incentive to sell right now if they’re going to have to go out and get a seven and a half percent mortgage. Plus affordability for buyers is lower, and so they’d probably have to take a lower price to sell their property. And so anyone who’s not forced to sell or is kind of on the fence about selling is just going to choose not to.
And so what we’re seeing, and I think will continue, is lower new listings. And when we think about the balance of supply and demand, I talked about before, when demand comes down, if supply comes down at the same time, prices can stay in equilibrium. And we are seeing lower new listings, but there’s a big but here. I do think that second category of active listings is going to go up because even though there are less new listings, the properties that do get listed are going to sit on the market longer. And so my expectations, I actually made these predictions over the summer publicly, and so far they have been correct, is that new listings would come down, but we would see active inventory go up. And when we see active inventory go up, I don’t think it’s going to be crazy because new listings are going down, but this could lead to price declines because we’re talking about the balance of supply and demand.
If we have more supply and less demand, we will get price declines. That’s just how it works. But it’s all relative. Are we seeing a huge reduction in demand and a huge increase in supply? No. We are seeing a reduction in demand and a modest increase in supply. And that to me is why we can expect modest declines in prices, but not a housing market crash. But of course, the fears people have are understandable at least because given what has happened in this country and the housing market over the last couple of decades, so you’re not wrong to wonder could that change in the future? Because the data, the new listings, the mortgage purchase applications, that helps us understand maybe a month or two or three in advance, but what about a year in advance or two years in advance? Could the things that happened in 2008 that not many people saw coming, could stuff like that be lurking in the background, not showing up in the data, could that come to bite us in the butt?
Because inventory looked fine in 2005, right? Well, luckily we have more data about that. We can look at some of the things that were brewing behind the scenes in 2008 and see if those are likely to happen again. And that data is mortgage delinquencies and foreclosures, because what happened in 2008 is not that all of a sudden a ton of people who own their home were happily living and doing whatever they do decided, I just want to sell my home right now, and they all did it at once. That is not what happened. What happened was that people fell behind on their mortgages and they were forced to sell. That is what ultimately drove up supply in 2008 is that people were going to get foreclosed on and they were forced to sell. And just a quick reminder of why that happened is there was very loose credit standards back then where basically anyone could go out and get a loan.
There were things called ninja loans, which are no income, no job kind of loans. They weren’t checking. People were just saying what their income was and it was really the wild, wild west. And another thing that happened during that time is a lot of those loans were adjustable rate mortgages. And so they would give what were called teaser rates. So the loan officers would go out and say, “Oh, you don’t have a job. Well, you’re going to pay 2% interest rate on this mortgage.” And people say, “Great, I can afford that.” But there were adjustable rate mortgages and then a year or two or three years later, whenever that interest rate adjust, all of a sudden those people who did not have a thorough vetting of whether they could pay back that mortgage couldn’t pay back that mortgage. And so they fell behind on their mortgages and ultimately many of them got foreclosed on.
And that created that spiral I talked about before. More supply hit the market that started to push home sales prices down slowly. People got spooked. Some demand left the market. That made home prices fall more than the layoff started and it created the spiral where supply was really up and demand was really down. And so let’s look at that. Is that likely to happen in 2026 or in the coming years? Well, as of right now, the evidence again says no. If you look at the delinquency rate, which I really see as the canary in the coal mine for another 2008 style crash. Now, could a crash materialize in a different way because of AI or something? Sure. Yeah, that can definitely happen. But forced selling is brought on by people falling behind on their mortgages as measured by delinquencies. And so when I look at the data, I can tell you right now that the national delinquency rate of mortgages is 3.53.
If you’re curious what it was in 2003 and 2004, it was above 4%, so it was higher than it is now. If you were curious where it was in 2008 and nine, it peaked at 10, 11%. So way, way, way higher. Now again, similar to new listings and inventory, people are going to say, “But delinquency rates are up.” Sure, they are up compared to 2021 and 2022 when there were mortgage forbearance programs and foreclosure moratoriums going on. That was a very unusual time in the housing market. So to compare today’s delinquency rate to 2022 does not make any sense. Of course, it is going to go up when those programs end. That is what’s to be expected. But if you look at the delinquency rate to say 2019, the last time we had a quote unquote normal housing market, it is below that level. So keep that in mind.
The delinquency rate in a historical context is still relatively low. Now, for a little while, it was starting to tick up, and I’ve said this on this show, I’ve said it on the market, that I would keep an eye on these things to let you know if these things change because to me, again, this is the canary in the coal mine. If we start to see delinquencies go up, the probability of a crash changes. We got to take one more quick break. We’ll be right back.
Welcome back to the BiggerPockets Podcast. I’m Dave Meyer, and today we’re talking about crash math. Right now, there are basically two sort of small areas of concern in the mortgage market, FHA loans and VA loans. Earlier this year, we saw the delinquency rate on FHA loans go up pretty considerably, but good news, those have actually started to level out. They’re still some of the highest they’ve been in the last 10 years or so, but seeing them start to level out, again, suggests that we are not in some sort of free fall where everything is going crazy. They went up and now they’re stabilizing. VA loans are sort of on a similar trajectory, but they haven’t leveled off. So we need to keep an eye on those, but just keep in mind that VA loans, FHA loans make up a pretty small portion of the mortgage market.
And so even if these go up a little bit, it’s not like it’s going to lead to some flood of delinquencies and foreclosures, but it is worth keeping an eye on. If you look at foreclosures, which are just sort of further down the funnel than delinquencies, they’re ones that don’t get cured and actually get auctioned off or short saled or whatever. And if you look at those, the same pattern is existing. They are gone up from pre-pandemic lows when there are all these programs in place, but they’re already starting to level off. They’re elevated from last year. You will see things that foreclosures are up 20 or 30% year over year. Those things are true. That is accurate. But the foreclosure rate in a historical context is still very reasonable. You cannot compare a time period where the government was saying you can’t foreclose on people to right now and say, “Hey, look, foreclosures went up.” That’s ridiculous, right?
You got to compare it to historical records. And right now, foreclosure rates look okay. I personally think they’ll probably keep going up. I’m not that worried about that. Will they go up to reversion to the mean to get closer to the average? Probably. You’ll probably still see some more headlines about it. But the idea that there is forced selling and a foreclosure crisis could be around the corner, again, it could happen if the unemployment rate goes crazy, but evidence right now, no. But we can even actually go one step further because you could, as a crazy analyst who wants to understand everything, do you want to understand what a lead indicator is for delinquencies? Can we look forward and see if delinquencies are likely? It’s not perfect, but there are some data sets we can look at. I like looking at credit quality, which is basically just like who are taking out mortgages and how good are their credit scores.
And check this baby out. I’m going to put this up for anyone who’s looking at this on YouTube, but you could just see this chart. It shows the average credit score of people who are taking out mortgages over time. It goes all the way back to 2003 to now. So it’s the last 23 years of data. And what you can see on this chart is that subprime mortgages where people have a credit score of 620 or less, basically disappear. I would have to take out a magnifying glass to look at this chart to be able to see the little line there at the bottom where subprime mortgages are. They basically do not exist. Even the loans to people who are in the 620 to 660 range, extremely low. By far, the biggest group, and I will say this is well above half of people who are taking out mortgages, not just now, but for the last 10 years or so, have a credit score of 760 or better.
Think about that. That is an elite level credit score. That is who is taking out mortgages. And that does not mean they’re immune from financial trouble. There are a lot of problems with credit scores. They’re not a perfect measure. But if you look at that alone and you say, are the things that led to the 2008 crash likely to happen again where subprime loans or people who couldn’t pay back their mortgages even when they got those mortgages, is that going to take down the housing market? Super, super, super unlikely. Subprime loans are gone. Credit quality is good. So when we look at all of this data together and ask ourselves, could a crash happen? Yeah, of course. To me, as I said, the risk is really in the labor market going south. If people start to lose their jobs in a serious way due to AI or anything else, that changes things.
That’s why I said at the beginning of this year, if you listen to some of my prediction episodes, I said that the probability of a crash was like 10%. It’s always like five or 10%. There’s always a chance that these things happen. It’s probably actually lower than that given we’ve had one real crash in the last hundred years. You could argue that it’s a 1% chance. I think it’s a little bit higher than that just because affordability is low. But that’s mostly emotional though, me saying 10%, because when you look at the data, really no evidence that it’s around the corner. So for 2026 at least, 10 at the most, I think, probability of a crash. For 2027, might be a little higher just because it’s further out. The risk is always higher the further out because your predictions are less good. But for now, just think about it.
Supply and demand, right? Demand is up, supply is up a little bit. This is the environment for relatively flat prices. It’s why I’ve been calling this the great stall because even though supply and demand are low, neither one of them is moving in either direction, and that is a perfect example of when prices stay flat. Now over the next year, are they going to go up a little bit, down a little bit, one or 2% in either direction? Sure. Yeah, but probably pretty flat. We’re in the great stall and no one knows what the future brings but evidence, which is the best thing we can do. All we can do is look at data and evidence and make informed decision, and the evidence suggests a crash remains very unlikely. All the other headlines you’re hearing are people who are reacting based on emotion, who don’t understand how housing market works or deliberately trying to mislead you.
The data is actually pretty clear about this today despite those headlines. So although I never tell you what will happen, I always try and tell you what will happen in probabilities. You may notice that, but I have been trained to say that as an analyst, you say this is the most likely thing to happen, this is the least likely thing to happen because no one knows. That is the only honest answer. But from where I sit, the probability of a crash in 2026 remains very low. Hopefully now that you understand some of the data and mechanics behind how a crash can happen, you can see this for yourself, and if you want to, you can track it for yourself. But I also give housing market updates on this podcast one time per month, and at the end of each of those episodes, I do a risk report, and you can check that out where I talk about the risk of a crash because I’m not trying to hide this from anyone.
If there is a crash coming and I thought that, I would tell you. I promise you I would tell you that. But for the last four or five years, I’ve been pretty right about the direction of housing prices. I said they would still go up in 2023, even though people were freaking out about mortgage rates. In 2024, I said they would go up modestly. I said they’d be close to flat last year. Those have all been right. I’ve said it’s going to be flat, maybe a little bit down this year. That’s looking pretty right right now too. I’m not trying to brag there will be a time that I am wrong, but I do give you my honest assessment. I am not trying to hide information here, and a flat market going forward is my honest assessment of what is most likely to happen. Stability and projecting out with a decent degree of confidence what’s likely to happen is all you can ask for as an investor to make decisions by, and hopefully this episode has helped you do just that.
Thank you all so much for watching this episode of the BiggerPockets Podcast. I’m Dave Meyer and I’ll see you next time.