The median price of a US single-family home has risen just over 40% since the last housing-market crash. While newspaper headlines may put readers on edge, our analysis indicates a gradual slowdown, not a bursting bubble—in most regions.

That’s largely because inventories remain tight and future demand looks healthy. Some market observers worry that recent declines in new and existing home sales are a possible warning of an impending crash. But we’ve done a deep dive into the market’s fundamentals to better understand the risks. The result? We believe the recent slump in home sales is due to lower housing affordability.

All About Affordability

Housing affordability declined in 2018 because of higher home prices and rising mortgage rates. Could this be a sign of an impending secular decline in home prices?

We don’t think so. We view today’s reduced affordability as a speed bump instead of a cliff. That’s because housing affordability is a function not only of mortgage payments but also of income. And income has been rising as the economy continues to chug along. Over time, this should help to moderate the negative effect of higher mortgage payments.

Furthermore, the decline in housing affordability hasn’t been massive. Homes are still more affordable than they were between 1999 and 2003, which was a healthy period in the housing market. And they are only moderately less affordable than between 2013 and 2016, which some observers consider the new normal.

That said, affordability could continue to decline as mortgage rates rise. If mortgage rates rise another 1.4%, for example, while home prices and income both hold steady, affordability will likely return to its 1999–2003 average.

Assessing Supply

If declining affordability is leading to lower home sales, the next question is whether lower home sales are leading to increased inventories. Such excess supply contributed to the last housing downturn.

Thankfully—and importantly—we aren’t seeing that today. Instead, supply remains tight.