Three Indicators
The supply of available homes, current buyer demand, and the number of distressed homes will collectively signal the next plunge in home values.
Many people argue that housing is due for a correction. Their rationale is that home prices surged at an unprecedented rate from 2020 through the first half of 2022. When mortgage rates jumped from 3.25% in January 2022 to 7.37% nine months later in October, home affordability plummeted to historically low levels. Affordability is based on household incomes, mortgage rates, and home values. Since household incomes have not skyrocketed, and mortgage rates have bounced around 7% for nearly three years, the natural conclusion is that prices must plunge to improve affordability. Many have exclaimed that they feel it in their “gut,” that it is not a matter of if prices correct, it is when.
Yet, economics does not adhere to intuition or a “gut” reading. Instead, it is best to turn to the facts, data, and current trendlines. There are three key indicators to watch for to determine when home prices will plunge: a glut of homes available for purchase, an elevated number of distressed homes, including both foreclosures and short sales, and weak demand. All three need to be present to instigate a price correction. That is precisely what occurred leading up to and during the Great Recession. According to the Freddie Mac House Price Index, the Los Angeles/Orange County metro area experienced a substantial year-over-year drop in June 2007, 2008, and 2010.
Where is Los Angeles County today in terms of the three factors: supply, demand, and distressed? Let the data reveal where the market is headed and allow it to set accurate market expectations.
- Supply of Available Homes: Despite many more sellers competing against each other, supply is still constrained compared to where it was leading up to and during the Great Recession. According to the National Association of REALTORS®, the national inventory today stands at 1,530,000 homes. In June 2006, there were 3,740,000, or 144% more, and in June 2007, there were 3,870,000, more than two and a half times today’s level. In July 2007, it eclipsed 4,000,000 homes. While the inventory may have grown over the past couple of years, it has remained at low levels compared to the glut of homes available leading up to and during the Great Recession.
in Los Angeles County, there are currently 15,280 homes available for sale. Yet, in July 2008, it climbed to 53,800, or 252% higher, more than triple. Today’s inventory is 36% higher than last year’s 11,274, and 95% higher than 2023’s 7,839 homes.
2. Buyer Demand: Mortgage rates have been stuck above 6% for three years, and buyer demand has been muted ever since. Demand had remained high from the second half of 2020, during the pandemic, through May 2022. The favorable mortgage rate environment fueled remarkable demand. That came to an abrupt end in 2022 when the Federal Reserve embarked on an unprecedented rate-hiking cycle. As mortgage rates soared, demand and closed sales activity plummeted. Demand will remain subdued as long as rates remain elevated, hovering around 7%.
Current demand (a snapshot of the number of new pending sales over the prior month) is at 3,628 pending sales, 4% less than last year’s 3,787, and 2% higher than 2023’s 3,566. The 3-year average before the pandemic (2017-2019) was 5,734 pending sales, a mind-boggling 58% higher than today. Through June, there were 22,236 closed sales in 2025, representing a 29% decrease from the 3-year pre-COVID average of 31,540 sales. Yes, Los Angeles County is currently experiencing extremely weak demand.
3.Distressed Homes: There have been very few distressed home sales for years now, and it is not going to change anytime soon. In June, there were only nine foreclosure sales and seven short sales out of the 4,022 total closed sales. That is 0.4% of all closed sales. Compare that to 4% in June 2007, 33% in 2008, 46% in 2009, and 41% in 2010.
Distressed properties are still below pre-pandemic levels. According to the ICE McDash loan-level database, the national delinquency rate for first-lien mortgages is currently at 3.2%, below the pre-pandemic average of 3.5% (2018-2019) and far below the 4.13% average from 2000 to 2005. The housing stock is the healthiest in U.S. history, thanks to tight lending standards that date back to 2010, when borrowers qualified with strong credit, great jobs, large down payments, and low mortgage rates. Homeowners are sitting on tremendous, record-high equity, and 40% own their homes free and clear.
When distressed homes are present, banks need to unload these nonperforming assets so that they can utilize the capital once again. They lack emotion when it comes to selling these assets. They “have to sell,” meaning they will do whatever it takes to secure a sale. That is vastly different than today. There are very few sellers who truly “have to sell.” Instead, the inventory is built on a collection of homeowners who are emotionally tied to their homes. It’s where their kids learned to ride a bike. They are not just selling a house; they are selling their “home.” This creates a real stickiness to pricing.
The Bottom Line: Only one of the three indicators for prices to plunge is present in today’s housing market, muted demand. There must be considerable additional pressure for prices to fall substantially, not just low demand. A glut of available homes, along with unemotional distressed sellers who “have to sell,” and weak demand are the necessary ingredients for housing to experience a correction. Prices will not plunge solely due to weak demand
