A housing ‘crash?’ What lower prices mean for homeowners and hopeful buyers.

Whether or not it pleases would-be buyers, we’re unlikely to have a repeat of a crash like the country experienced from 2008 to 2014, when house prices fell by double-digit percentages from their 2007 peak.

Prices “might go down a little bit, but a crash I consider to be a more than 10% decline in home values, and that seems far-fetched right now,” says Daryl Fairweather, chief economist for real estate brokerage Redfin
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Some forecasters expect home prices to drop nationally by a few percentage points over the next year or two and to fall significantly in a few metro areas. But little consensus exists on which cities will have the biggest declines.

Whether you long to buy your first home or you own one and have considered selling, here’s what falling prices could mean for you.

If prices fall, buyers may stall

Let’s say you want to buy a home and prices are dropping in your city. You’ll be tempted to wait. After all, why buy a house today if you believe you’ll be able to pay less for a similar house in a few months?

The problem with this ironclad logic is that you can’t predict when prices will hit bottom. Wait too long, and you’ll end up trying to buy when prices are rising and competition is increasing. This strategy, called market timing, is inadvisable, says Odeta Kushi, deputy chief economist for First American Financial Corp.

“If you can find a house that meets your financial expectations for a monthly payment and it is a good time for you to buy, then do that,” she says.

And if you wait for prices to fall but they never do, you may discover the hard way that the “house that you found a year ago that you really loved, that you could afford but you passed up on, is more expensive next year,” Kushi says.

Human nature being what it is, you’ll probably try to time the market anyway. But, hey, you’ve been warned.

Learn more: Why housing has ‘a lot of wiggle room’ in a recession, even if prices drop 15%

Sellers’ qualms set a floor under prices

The wait for home prices to plunge could be thwarted by homeowners’ unwillingness to give up what they’ve gained — and during the pandemic-era housing boom, homeowners got a couple of things they’ll want to keep.

The first is inflated home values. Kushi calls home prices “downward sticky,” meaning that sellers are reluctant to accept reductions unless they’re desperate to sell. “If you don’t have to sell, you just sit tight, right?” she says.

The other thing that homeowners cling to: low mortgage rates. Through refinancing or well-timed purchases, 92% of homeowners with mortgages have rates below 5%, and half have rates below 3.5%, housing analyst Ivy Zelman said in a Macro Hive podcast interview in July.

A lot of those homeowners will snuggle their low mortgage rates and vow to never leave.

“If you’re a homeowner today who’s locked into a 2.6% or 2.7% mortgage rate, what’s your incentive to sell your home and purchase a home at a higher mortgage rate today?” First American’s chief economist, Mark Fleming, said in the REconomy podcast. “Not much. You’re rate-locked in.”

There already are signs of a “sellers’ strike,” as economics blogger Bill McBride calls this phenomenon in his Calculated Risk newsletter. In a survey of 25 housing markets, McBride noted a 10.6% decline in new listings in August compared with a year before.

Homeowners’ obstinacy affects would-be home buyers in a fundamental way: When owners keep their homes off the market, they reduce the number that are available to buy. A limited supply could restrain a drop in prices as buyers compete for meager offerings.

Read: Most economists see the U.S. turning into a buyer’s housing market in 2023. Here’s where you’ll see the biggest declines in value.

When you owe more than the home is worth

Nearly 10 million existing homes have been sold since the beginning of 2021 in an era of swift price growth. A drop in home values would mean that recent buyers — the ones who made small down payments and started without much equity — could end up owing more than their houses are worth. It’s known as being upside-down. If you end up in this situation, you have a few options.

• Keep the house, make all the mortgage payments, and wait for home prices to recover. This will be the most popular option, even for families that outgrow their homes.

• If you sell the house while upside-down, you’ll have to tap savings to pay off the full loan balance as well as real estate commissions and other costs.

• What if you don’t have enough cash to repay the mortgage balance? You can seek the lender’s permission to sell the house in a short sale. The lender might deny permission, though, if you can afford the monthly house payments. That would lock you into Option 1, keeping the house and waiting until it’s worth more than you owe on it.

Also see: Home buyers are backing out of contracts in the Sun Belt, especially in Las Vegas, Phoenix, Tampa and Texas

Less equity to borrow against

Finally, there’s the matter of home equity loans and home equity lines of credit, or HELOCs. These are second mortgages that allow you to borrow against your home’s equity. To qualify for either, you’ll need to have enough equity: at least 20%, or in some cases, 15%.

It’s possible that falling home values could erase enough equity to drop you below the 15% or 20% threshold, making you ineligible for a home equity loan or HELOC. Even if you get a HELOC before that happens, the lender could reduce your credit limit later to bring it back in line with your home’s value.

During the hottest period of the pandemic-era housing boom, when prices were rising more than 15% per year, few buyers were worried about home values eventually falling. That exuberant, competitive heedlessness is now being replaced by caution — what housing economist Ali Wolf dubs FOBATT, or fear of buying at the top.

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Holden Lewis writes for NerdWallet. Email: [email protected]. Twitter: @HoldenL.