What goes up must come down and a lot of people are worried about a repeat of the last housing crash, but no one knows what the bottom will look like following the pandemic housing boom.

Leading up to the housing bust and the Great Recession of 2008, interest rates had sunk from 6.5 percent in 2000 to 1 percent in 2003 and loose lending standards meant mortgage applicants qualified for loans without income verification. The Fed started raising rates in 2004, and by 2006, the Federal funds rate was at 5.25 percent. Home prices started to fall.

U.S. home prices declined 28 percent from 2006 to 2009, sinking the value of 11 million homes below their mortgage balances, triggering widespread defaults, almost collapsing the financial system and setting off a recession, Wall Street Journal reported.

The equity in people’s homes in 2005 was around $15 trillion while mortgage debt stood at $9 trillion. Once the bubble burst, equity and debt flipped and a lot of homeowners were underwater.

The U.S. housing market surged again during the pandemic when homebound workers could work from anywhere and interest rates were at record lows. Real estate agents reported buyers lining up outside open houses and bidding wars. 

By comparison, home equity in late 2022 was more than $30 trillion while mortgage debts had increased to about $12 trillion.

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“That is a massive spread, unlike anything we’ve ever seen,” wrote Ben Carlson, director of institutional asset management for investment advisor Ritholtz Wealth Management in a blog.

Home prices would have to fall 40-to-45 percent from their peak to put the same proportion of mortgaged homes underwater today, according to a CoreLogic analysis, Wall Street Journal reported.

“It makes the housing bubble look quaint by comparison,” Carlson wrote.

Mortgage interest rates are considered the main driver of the housing slowdown. Rates fell to record lows below 3 percent in 2020 and 2021 during the pandemic due to emergency actions by the Federal Reserve. That changed in 2022. With the inflation rate at 50-year highs, mortgage interest rates rose to their highest levels since 2002.

Housing market activity to date does not show a year-over-year decline of home prices on a national scale – at least not yet, U.S. News reported on Jan. 12. The data do show month-to-month home price declines.

In the last four weeks of 2022, the median home price was $350,000, 0.5 percent higher than the same period in 2021, according to Redfin.

Home price growth has seen a marked deceleration due to a combination of already high home prices, high mortgage interest rates, low housing inventory and economic uncertainty. Many would-be homebuyers are opting out.

“Home prices can (and probably should) fall more from here,” Carlson said. “I have a hard time believing homeowners would ever willingly sell their homes at prices 40-45% lower than the peak but I have no idea what the right number is.”

For many Americans, most of their net worth is tied up in their homes, wrote Lance Roberts, chief portfolio strategist/economist for RIA. “As home price depreciation gains traction, more homeowners will be dragged into selling to retain what value they had. As the value fades, the decision to sell becomes more of a panic rather than a need.”

It’s not the same as in 2008, Roberts wrote. There is no “vast wasteland of bad mortgages sitting on the books” but “that doesn’t negate the risk of further home price declines in the coming year … Not only are further home price declines possible, but it is also probable they could be deeper than many currently expect.”

Whatever happens in the housing market is subject to unknown variables including mortgage rates, the unemployment rate, economic and wage growth, Carlson said. Markets “are constantly surprising — both to the upside and the downside.”