The journey to this predicament can be traced back to last year’s sharp rise in mortgage rates, which escalated from 3% to over 7%. That rate surge, coupled with the Pandemic Housing Boom pushing U.S. home prices up over 40% in just over two years, deteriorated housing affordability across the nation.

“The housing market is at a pivotal point as we head into fall. Mortgage rates are now at more than a two-decade high, and for some home shoppers, those higher rates are enough to cause them to step back from the market,” wrote Lisa Sturtevant, chief economist at Bright MLS, in a statement to Fortune. “It is likely to be a very slow fall [in the] housing market this year. Home prices, which had rebounded this summer, will dip in some markets as new listing activity increases at the same time a segment of the homebuying population sits the market out.”

While Sturtevant doesn’t expect “major [house] price corrections since supply is still at historically low levels and overall economic conditions remain healthy,” she does see risk in overheated housing markets. House prices in places like Austin and Boise have already started to fall again.

“The markets at greatest risk of price declines are those where affordability challenges are the worst, including some West Coast markets, as well as places where prices have run up quickly, including in parts of the Sunbelt,” Sturtevant says.

While the current lack of housing affordability echoes the affordability conditions leading up to the 2008 housing crash, there are distinct differences that set the two periods apart. Unlike the years preceding the 2008 crash, the nation is not grappling with an excessive surplus of existing homes for sale. In fact, housing inventory levels are hovering at historic lows, with July 2023 witnessing a staggering 47% decline in homes available for sale compared to July 2019.

Furthermore, the U.S. housing market in 2023 is not plagued by the risky mortgage products that contributed to the 2008 bust. In fact, the Pandemic Housing Boom was the opposite of the boom in the aughts: This boom was primarily led by households with high incomes, who because of low mortgage rates and remote-work policies were seeking out a new home.

The path to improving housing affordability moving forward rests on three key levers (see chart above): rising incomes, declining home prices, or lower mortgage rates.

Among these, mortgage rates hold the greatest potential for short-term impact. Unlike home prices that have shown a historical resistance to steep declines, mortgage rates are inherently volatile and can rapidly shift downward if financial markets loosen. For instance, many economists believe if the Federal Reserve’s battle against inflation triggers a recession, it would likely push mortgage rates lower.

While a forecast released on Monday by the Mortgage Bankers Association anticipates a decline in the average 30-year fixed mortgage rate to 6.2% by Q4 2023 and further down to 5% by Q4 2024, renowned housing analyst Bill McBride expresses skepticism. McBride voiced his reservations, stating that “in my humble opinion, rates will be higher for longer than they expect.”

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