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Does the U.S. Risk Another Housing Market Fall?

In this special report from J.P. Morgan Research, explore the current U.S. housing market and the risk of a correction.

Updated: July 8, 2022

There is a low risk of another U.S. housing market correction, and J.P. Morgan Research forecasts that home prices will increase 12.5% in 2022. House prices climbed around 20% in the last year, according to data from the CoreLogic Home Prices Index Report, the Federal Housing Finance Agency and Case-Shiller.

However, it has been unusual for economic expansions to last more than a few years after the economy reaches full employment, and the country should remain on the lookout for early signs of imbalances. With the events of 2007-2009 still lingering on investors’ minds, as well as the events of the COVID-19 pandemic, the housing market is an obvious place to look for signs of overheating.

In this report, J.P. Morgan Research takes an in-depth look into the housing market and examines potential correction risks, while assessing the likely future trajectory of U.S. home prices.

What Causes the Housing Market to Rise and Fall?

Unpacked: The Housing Market

Global house prices have increased at their fastest pace in 40 years. What is driving this rise? From supply and demand to the cost of supplies and labor shortages, learn about the key dynamics that are impacting the housing market.

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Unpacked: The Housing Market

Global house prices have increased at their fastest pace in 40 years. What is driving this rise? From supply and demand to the cost of supplies and labor shortages, learn about the key dynamics that are impacting the housing market.

Since the early twentieth century, housing prices in the United States and other developed countries have continued to rise.

But major world events have caused drastic fluctuations in property value.

During the COVID-19 pandemic, for example, the housing market remained resilient. Record demand outpaced the number of homes available which caused prices to increase at their fastest pace in forty years. It’s unclear if, and when, housing prices will cool off.

So, what causes home prices to rise and fall?

This is the housing market, unpacked.

Supply and demand ultimately determine house prices, but there are additional factors that can affect the market.

The cost of building impacts supply – particularly when supply chain delays make it challenging to get materials.

Labor also plays a part in the market. The construction sector still employs fewer workers than before the pandemic despite the increased demand for homes.

Interest rates and inflation are also key factors.

The U.S. Federal Reserve typically lowers interest rates to boost economic activity.

During the pandemic, for example, the Fed lowered short-term interest rates to near zero and mortgage interest rates fell to the lowest levels on record.

Inflation is the average increase in prices consumers pay for goods and services.

The Fed aims for two percent inflation annually, but it can rise and fall depending on changes in supply and demand.

Home prices and rents tend to move along with overall inflation. If the average prices of goods, services, wages, and business costs are rising rapidly, home prices and rents will likely rise quickly, too.

But sometimes housing costs can increase more rapidly. That’s what happened with single-family homes when demand surged during the pandemic.

Following World War II, populations grew, and urban areas developed into vibrant economies with high-paying jobs.

People moved closer to cities, so demand increased. Supply became limited in these high-density locations, and space restrictions and zoning laws made new constructions challenging.

The demand began to outweigh the supply, so prices increased.

It’s estimated that housing prices have nearly tripled since the 1950s – even after adjusting for inflation.

During the Global Financial Crisis in the early 2000s, home prices plummeted.

Households took on large mortgage debts to enable home purchases. With so many people looking to buy homes, a building boom happened across larger states where plenty of land was available for construction.

This created an overabundance in supply and homes were sometimes priced much higher than the cost of land and construction.

Prices eventually tumbled during the recession, falling 34 percent by 2012.

The remote work requirements of the COVID-19 pandemic had people re-evaluating their space and location needs. Consumer spending shifted from things like traveling and dining out to home office furniture and electronics.

As priorities shifted, the housing market saw an initial drop in desire for dense, expensive cities like New York, San Francisco, and Washington D.C.

… and more interest in less dense, more affordable areas like Miami and Dallas.

Millennials – who make up about 25 percent of the US population – have always been reluctant to move out of these cities, preferring to rent.

But during the pandemic, Millennials began prioritizing space over job proximity. As they searched for homes outside of cities, they contributed to the rise in suburban house prices.

Demand for urban housing eventually returned, but also remained steady in the suburbs.

This heightened interest applied to all types of builds, whether an apartment or single-family home.

With inventory at all-time lows, renters and buyers faced prices thirteen percent above pre-pandemic levels in the second quarter of 2021.

Questions still remain – is the U.S. in a housing bubble? Will prices fall?

Not necessarily.

Rapid price increases don’t mean a correction will happen. History has shown that prices can rise quickly over the years… only to stabilize or even keep climbing.

The nationwide nominal house price index is now 40% above its 2012 low-point and 4% above the peak reached in 2006.

bar-graph Created with Sketch. 2017 2012 2006

Where the Prices are Higher

After robust gains over the past five years, the nationwide nominal house price index is now 40% above its 2012 low-point and 4% above the peak reached in 2006. If 2006 was a historic bubble, then current price levels should be looked at more closely. In examining a selection of the largest counties in the U.S., today and back in 2006, there is wide variation across counties both in the level of housing prices and in their change since 2006.

callout box with green border on left containing key text from the article

Median home values per square foot in Manhattan are about 20 times higher than those in places such as Detroit and Cleveland, whereas the prices in the San Francisco Bay Area are around 10 times higher. While prices in most counties are still below 2006 levels, prices in a handful of places, such as New York City, the San Francisco Bay Area, Boston, Seattle, Denver, and Portland, Oregon have substantially increased since then.

What drives the risk of a house price correction

The housing bust and subsequent recession were deepest in the areas where mortgage borrowing expanded the most in the pre-crisis years, driving unsustainable increases in prices. During the 2006-2011 housing bust, price declines were closely intertwined with growth in mortgage debt during the boom. The growth in mortgage debt from 2003 to 2006 explains about half of the variation across counties in the decline in real prices from 2006 to 2011.

Another notable feature of the mid-2000s housing market is the presence of high prices even in places where the supply of housing could – and did – expand rapidly. Indeed, in the mid-2000s, prices rose well above cost in a number of markets where the housing permit data show that supply was expanding rapidly.
Median Home Price per sq ft. in 50 Largest Markets

Zillow inflation-adjusted median home value per square foot ($)


Wide variation across counties exists in the level of housing prices and in their change since 2006.


Zillow inflation-adjusted median home value per square foot ($)

Where are we Now?

Today’s housing market looks quite different from that in the mid-2000s. As households spent much of the recovery paying down debt, there are few places where real debt per capita has increased over the past few years. Even in states such as New York and California that have high and increasing house prices, there has been no sign recently of the kind of debt growth seen during the housing boom.

While households spent much of the recovery paying down debt, real debt growth per capita in select states has remained positive.

Today, unlike in the mid-2000s, there are few counties where prices are high, even though the supply of new housing has increased significantly. The vast majority of counties in the nation that are clustered on the left in the “Mortgage debt per capita in select states” chart feature either low prices and sluggish construction – such as many Midwestern and rust belt cities – or constraints on the supply response to high prices, such as much of the East Coast and California. On the lower right side of the chart, an ample increase in supply has kept prices in check, despite growing demand in southern states such as North Carolina, Georgia, Florida, and Texas.

callout box with green border on left containing key text from the article

The curve shows the combinations of prices and permit issuance that would produce the same forecast probability of a housing correction as Phoenix in 2006, according to this model. Very few counties fall above or even close to the curve: Places such as New York City and the San Francisco Bay area with staggeringly high prices suggest some chance of correction even with constrained supply, as does elevated prices and substantial supply growth in Seattle (WAKI), Denver (CODN), DC, and Arlington.

Where is there greater risk of a correction than in Phoenix in 2006?

Curve height represents Higher risk in Phoenix in 2006 and the lower tail represents Lower risk in Phoenix in 2006

What are the risk factors that predict the likelihood of a housing price correction?

The map below identifies a few different variables that would have had some success in forecasting the likelihood of a housing price correction across counties after the boom, and lists the counties currently most at risk according to those factors. Areas such as central California and Las Vegas that have experienced rapid prices gains over the last five years should continue to be monitored.

Select a risk factor to reveal counties most at risk

Rapid price growth

High price levels

High price levels despite expanding supply

San Francisco Bay Area Manhattan, New York Central California Portland, OR King (Seattle), WA Clark (Las Vegas), NV Denver, CO Washington D.C. Suffolk (Boston), MA King (Seattle), WA Portland, OR


All housing markets are local, and county-level data do not capture all of the nuances that could drive the price of a given home in a given neighborhood. On the whole, the U.S. housing market still looks considerably less risky than it did in the mid-2000s. While there are some pockets of rapid price growth and extremely high price levels, in addition to a few places with fairly high prices despite growing supply, there is nowhere that has combined these price patterns with rapid debt growth, as occurred in some places in the mid-2000s.

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