Because the housing market is highly interest-rate-sensitive, the Federal Reserve's hiking cycle has had a cooling effect. "It has raised concerns we could see something like what happened in the wake of the subprime mortgage crisis, when foreclosures flooded the market, intensifying the decline in home prices," Hirt said. "But this is a very different housing market from the previous one, as borrower health overall is in a much better place."

In periods of rapid home-price declines like we saw after the subprime crisis in 2007, homeowners can find themselves owing more than their home is worth. By 2011, more than a quarter of all U.S. mortgage holders were underwater. Such mortgage holders are much more likely to default, resulting in foreclosures that then add to supply and put downward pressure on prices. Lax lending practices and greater reliance on variable-rate mortgages at that time also made it tough for some homeowners to keep making their payments when interest rates rose.

“Forced supply coming onto the market is much less likely in this housing downturn,” said Konstantin Nikolaev, a Vanguard high-yield fixed income credit analyst on the team covering building materials. “Mortgage companies have been holding borrowers to much higher standards since the subprime crisis. And fixed-rate loans, which keep a homeowner’s mortgage payments from climbing even when interest rates rise, are much more prevalent today. Currently only 2% of homeowners owe more than their home is worth.”

The chart shows our projections of how home-price declines could affect supply. Even if prices fell by 20%, we would expect to see supply—the number of homes for sale as a percentage of U.S. households—rise to only about 1.9%, well below the peak during the subprime crisis of about 3.3% and the preceding 10-year average of about 2.4%.

Housing affordability has been dented by the rise in mortgage rates—they’ve roughly doubled over the past year. But the equity cushion that the vast majority of homeowners have, the more stringent standards they were held to for obtaining a mortgage, and the more favorable financing terms they were given make a supply shock from foreclosures unlikely.

In fact, homeowners’ financial health—along with an undersupply of homes and supportive demographic trends—should put housing on the path to becoming an economic stabilizer, with negative contributions to GDP since mid-2021 turning positive by 2024.

• U.S. housing market has more—and more willing—buyers (article, issued June 2023)
• U.S. housing: Cyclical weakness, structural strength (article, issued June 2023)
• Why the Fed will not cut rates this year (article, issued June 2023)
• In America and Europe, higher rates for longer (article, issued May 2023)