There has been much debate over whether the economy will or will not suffer a recession this year. There is no debate that housing is in recession. Home sales, the construction of single family homes, and house prices are falling.

Housing is struggling because most households simply cannot afford to purchase a home. The pandemic surge in house prices and run-up in mortgage rates during the past year mean monthly mortgage payments on a new home gobble up too much household income. Consider a household earning the median income – half of households earn more, half less – purchasing the median- priced home with a traditional 20 percent down payment. With a fixed mortgage rate, this household would shell out $1,900 per month in mortgage payments, equal to almost one-third of their income. Ouch.

The housing market will not find its footing until affordability is restored. That will require lower mortgage rates, higher household incomes, lower home prices, or some combination of all three. The latter is most likely but will not play out quickly. So buckle up.

The housing market’s comeuppance has been extraordinarily sudden. From the end of the financial crisis through the pandemic, housing had a monster run. The price of a typical home more than doubled. If you were fortunate enough to purchase a home a decade ago, and had put 20 percent down, the annualized return on your investment would have been eye-popping, more than 25 percent. No other investment came close to providing that kind of a return, save perhaps cryptocurrency which has since crashed.

Low mortgage rates fueled house price gains during this run. The rate on a 30-year fixed-rate loan never got above 5 percent for very long and fell during the height of the pandemic to an all-time low near 2.5 percent. When rates were at their lowest, the typical homeowner who bought the typically-priced home with 20 percent down had a very affordable monthly mortgage payment of $1,250, equal to about one-fifth of their income.

Low mortgage rates also ignited several massive mortgage refinancing waves, in which existing homeowners paid off the old mortgage with a new one at a much lower rate. The average rate on all outstanding mortgages is now close to 3.5 percent.

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Single-family homes in a Miami neighborhood in May.

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A Chicago home for sale in January 2022. Nationwide, existing-home sales declined 4.6 percent in December from the prior month. The sales drop was mostly attributed to a shortage of properties on the market.

However, house prices got really juiced-up during the pandemic and the resulting surge in housing demand as people figured that if they were going to be stuck at home, they wanted more space. Many city apartment dwellers also wanted to escape to safer suburbs and exurbs. Remote work empowered moves to far-flung places where housing was much cheaper. Before the pandemic, about 350,000 more people left urban areas than moved to them in a typical year, according to Moody’s Analytics and Equifax. By the summer of 2021, at the height of the remote work moves, it was double that.

Big-city households in the Northeast, from Boston to Washington, left for places mostly in the Southeast and Texas. West Coast city dwellers moved inland to the Mountain West and Texas. And people from Chicago and other Midwestern cities went South and West. For households leaving these big cities, where high house prices are the norm, the homes they moved to seemed a bargain. Even as prices got bid up, homes still seemed cheap.

From the start of the pandemic to the peak in house prices last summer, house prices nationwide rose a whopping 40 percent. In places like Boise, Idaho, Austin Texas, and Miami – the poster children for remote work move-in destinations – prices jumped more than 60 percent.

But the highflying house market has come careening to earth. A dramatic run-up in interest rates catalyzed the reversal. The Federal Reserve began raising rates about this time last year and since has engaged in a nearly unprecedented series of rate hikes meant to cool the economy and quell inflation. Mortgage rates have jumped in turn. The rate on a 30-year fixed rate loan rose to over 7 percent not long ago. The last time they were as high was two decades ago.

Higher rates combined with higher house prices make housing unaffordable. Potential first-time home buyers are effectively locked out of the market. Potential trade-up borrowers have been effectively locked into their homes when it makes little economic sense to sell an existing home with a 3.5 percent mortgage to buy another with a 7 percent mortgage. Meanwhile, those ubiquitous housing investors – who buy homes not to live in but to rent out – have gone to the sidelines waiting for prices to decline and a better investment opportunity.

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A March 18, 2020, photo of a housing site in Zelienople, Pa. The housing market stalled, but homebuilder stocks were up sharply amid signs that sales were starting to improve. Still, the outlook for a market recovery remained cloudy, given uncertainty over the pandemic’s impact.

Home sales have been hammered. They are about as low as they were briefly when the economy shut down at the start of the pandemic and during the worst of the financial crisis. Single-family housing construction has also taken it on the chin, but cushioning the decline is home builders’ willingness to cut the effective price of their new homes. Particularly popular are temporary interest rate buydowns to lower the mortgage cost for a limited period, allowing the buyer to reduce monthly payments during the early years of a mortgage.

Prices for existing homes have also declined from their peak last summer but only by a few percentage points. These price declines have only begun. It will not be surprising if prices fall as much as 10 percent from their peak, and even this depends on some moderation in mortgage rates as the economy struggles while avoiding a recession in the coming months. It will take a price decline of this magnitude to sufficiently restore housing affordability and revive the market.

The price declines will take time to play out. Homeowners who are contemplating listing their homes for sale are holding off, hoping beyond hope that mortgage rates come down and they can get what they think their home is worth. For most people that price is the one Zillow showed at the height of the market. But they can only do this for so long. Life catches up and changing family circumstances will force them to move. It may take a couple years, at least, for house prices to bottom out.

The price declines will be coast-to-coast, but the biggest declines will occur in those parts of the country where affordability is the most challenged and the job market weakest. The Bay Area of California comes to mind. It is among the highest-priced metro areas in the country. Given the troubled tech sector, which will only suffer more with the recent failure of Silicon Valley Bank, price declines well into the double-digits seem likely. Similarly vulnerable areas include Boston, Washington, Raleigh, N.C., Austin and Denver.

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New homes under construction at a housing development in March in Novato, Calif. A report by the Commerce Department indicated sales of new single-family houses slowed in February as mortgage rates inch up and and house prices continue to rise.

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A line forms outside a Silicon Valley Bank branch location on March 13 in Wellesley, Mass. On March 10, the bank failed after making a bad bet on falling rates and absorbing big losses in the bond market – news of which started a massive bank run.

House prices in metro areas that got pumped up from remote work move-ins also have some significant adjusting to do. Remote work is here to stay, but it is moderating as companies that lease office towers in big urban centers have reopened and are requiring their employees to return. Most Mountain West metro areas are in this group as are many areas in the Southeast.

While house prices are set to decline, they will not crash. That is, prices will not decline so much that they wipe out the equity homeowners have built up and ignite a tsunami of mortgage defaults, foreclosures, and distressed home sales. That was the vicious reinforcing cycle that took hold in the financial crisis. Indeed, if house prices decline 10 percent as anticipated, that will only retrace one fifth of the house price gains of the pandemic era.

Also forestalling a dark scenario are the reforms to mortgage lending in the wake of the financial crisis. Those measures all but ban the toxic loans made to sketchy home buyers so common before the crisis, such as the teaser-rate two-year subprime loan, the negative amortization loan, and the Ninja mortgage loan. They are long gone. Ruling the day now are plain vanilla 30-year mortgages to borrowers with good credit scores. It is hard to see many of these borrowers defaulting on their loans.

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A home under construction on March 15, 2021, in Houston. Back then, homebuilder stocks went on a tear as investors bet that a dearth of previously occupied properties on the market and moderating mortgage rates would boost builders’ prospects in the spring buying season.

The severe shortage of homes that developed after the home building collapse in the financial crisis will also put a floor under house prices. Many home builders and suppliers were wiped out in that housing bust, and not until just before the pandemic were builders back to putting up enough homes. Then the pandemic hit, scrambling global supply chains for building materials and appliances, and making it tough to find construction workers. The result is a shortfall of an estimated 1.5 million homes, especially lower-priced homes and affordable rental units. This is about the number of homes built in a typical year.

The housing market and homeowners have a tough couple of years ahead. But for those who have owned a home for more than a year or two, their home will remain a rock-solid investment. And once affordability is restored, the next generation of households can become homeowners. Getting there is critical to the financial well-being of those households, their communities, and the broader economy.

— Mark Zandi is chief economist at Moody’s Analytics.