If home prices fall rapidly, buyers may find themselves with underwater mortgages, forcing them to either stay in the house until the market recovers or sell and lose money.
Homeowners owe more on their mortgages than their homes are worth and are unable to sell because they cannot afford the increased payments.
Neither the early 1980s' 20% interest rates nor the early 1990s' devastation of the savings and loan sector resulted in a similar drop in property values.
Recessions do not always harm the housing market. Despite the 2001 recession, the real estate market and demand remained healthy.
The housing market has faced several challenges over the last century, but none have resulted in a drop in home values comparable to the Great Recession of 2007.
The COVID-19 pandemic had no effect on home prices. It instead skyrocketed. According to the Case-Shiller Home Price Index, they will be a record $226,800 in September 2020.
According to the S&P CoreLogic Case-Shiller US National Home Price Index, home prices will rise 18.8% in 2021, the highest increase in 34 years and far exceeding the 10.4% increase in 2020.
Buyers withdraw as prices become unsustainable and interest rates rise. When interest rates rise, borrowers are discouraged from taking out loans.
Housebuilding costs will rise, reducing the market supply of dwellings. A gradual rise in interest rates will be less damaging to the housing market in 2022 than a sharp increase.