Here, in very short form, is how housing busts normally happen:

• A “seller’s market” evolves, where buyers have to pay up to get their first choice. Prices rise gradually, and then quickly, as buyers start to panic and sellers are emboldened to hold out for more.
• This boom continues until the average buyer can’t afford anything close to the average house. Offers dry up, and the number of sales declines.
• The handful of homeowners who, for whatever reason, have to sell find that they have no choice but to cut their asking prices.
• Seeing this, the (much larger) group of homeowners who are on the fence about selling conclude that they’d better do so before prices fall even further. Inventory of homes for sale spikes, swamping the small number of qualified buyers and causing prices to plunge.
• The resulting housing bust pushes the broader economy into recession, which lowers the pool of credit-worthy homebuyers and pushes prices down to levels that are cheap relative to incomes. And the cycle begins again.

Where are we in this process? At the most exciting/terrifying part: the beginning of the bust

For most of the past decade, the US housing market was defined by a shortage of inventory. Very few homeowners wanted to sell, leaving would-be buyers with no choice but to pay increasingly ludicrous prices for whatever was available. The median US home price nearly tripled between 2011 and 2024, with prices in some hot markets rising even more.

Eventually, most buyers were priced out of the housing market and the number of sales cratered.

Then everything changed. In just the past few months, would-be sellers have concluded that it’s now or never, and have entered the market en masse. According to real estate analysis firm Redfin, there are now 1.9 million sellers versus just 1.4 million buyers. This 33% gap is up from just 6% one year ago.

From Shortage to glut

In April, the supply of homes for sale across the US (calculated as months of supply at current rate of sales) was the second highest for that month since 2017.

As Wolf Richter notes:

Inventory is piling up in all major markets in California, such as by +70% year-over-year in San Diego County, +68% in the San Jose-Sunnyvale-Santa Clara metro, +50% in Los Angeles County, +43% in the Fresno metro (Central Valley), +75% in Orange County, or +43% in the San Francisco-Oakland-Fremont metro.

In the previously red-hot Florida and Texas markets, the story is the same, with a massive inventory build-up meeting buyer reluctance:

No help from interest rates

Buyers are clearly uninterested in homes at today’s prices. But there are two components to “price,” one of which is the cost of a mortgage. If that rate falls, the cost of homeownership falls in tandem. So in theory, much lower interest rates could make homes more affordable and bring the market back into balance.

But that’s not happening. 30-year fixed-rate mortgages key off the 10-year Treasury note yield, and it’s going up, not down.

A 4.5% 10-year yield translates into a 7% mortgage rate, so homebuyers will get no help from that quarter.

Prices have to plunge

If mortgage rates are stable and homes are, let’s say, 40% overvalued relative to incomes (and incomes are falling as the next recession approaches), then home prices have to fall by at least 40%.

Now imagine the impact of this realization on three groups of potential panic sellers:

• Wall Street firms that are using cheap money to buy entire neighborhoods for conversion to rentals.
• Baby Boomers who are entering their 70s with McMansions they can’t maintain.
• Airbnb entrepreneurs who have stretched to buy as many apartments and/or houses as possible, on the assumption that they’ll always generate plentiful cash flow.

Between them, these three groups own tens of millions of housing units. And they’re watching current developments with rising anxiety. When they bail, the fun really begins.