The question on everyone’s minds: Will the real estate market crash?
It’s a fair question to ask. Surging home prices and rampant inflation after two record-setting years are enough to make anyone think twice.
So, where are we headed, and how do we prepare?
Let’s turn to the real estate experts and consider some key facts. These clues, along with a look back at history, should give us an idea.
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Current Factors Affecting the Real Estate Housing Market
Before we get into the signs of a housing market crash and whether or not we’re heading for one, let’s look at what factors impact the real estate housing market.
As of May 2022, the national inflation rate hovers around 8.5%. We’ve all taken notice of this change and have certainly seen our grocery and gas tank bills run a little higher than usual.
But what does this mean for the real estate market?
Many people thought real estate has always been a “hedge” against inflation – A tangible asset with intrinsic value that increases steadily over time. So while rent goes up, your current mortgage rate stays the same. In addition to this, inflation also “eats” at existing debts, so your $200,000 mortgage effectively becomes “cheaper.”
However, if you’re in the market for a real estate purchase, home buyers will meet with higher housing prices. This increase brings on higher construction costs and a generally elevated price level. Not to mention higher interest rates.
Higher Mortgage Rates
What does this mean for the market? First, it will take a specific chunk of buyers out of the ring. Fewer buyers might start to see the supply and demand equilibrium balance out a bit.
According to a report from Redfin, 12% of home sales had a price drop in the four weeks leading up to April 3.
As we saw in 2020, consumer demand significantly impacts the real estate market.
People were spending more time at home and looking for more comfortable places to live. In addition to this, Millennials, the largest generation of homebuyers, began settling down and buying up properties.
It’s the simple law of supply and demand: when product demand increases, so does the price.
If rising mortgage rates hinder home price growth, limited housing supply increases prices. And because of this, buyers are still having difficulty getting their hands on affordable housing.
New home sales were down 8.6% in March. But, again, we can attribute this to the prices of inflated raw materials and pandemic-related supply chain issues.
Some say this issue predates the pandemic and is rooted in the 2008 financial crisis. When the housing market boom ended, tradespeople found work elsewhere – leaving the workforce without labor to spare.
Fast forward to 2020, and demand is higher than ever. Unsuspecting builders with no time to prepare and supply chain issues made a recipe for disaster (and housing shortage.)
Signs of a Real Estate Market Crash
We’ve been through this before, but what are the signs of a looming housing bubble burst? And are we seeing them? Let’s take a look.
In the first quarter of 2022, we saw foreclosure rates hit post-pandemic highs. ATTOM reports a total of 78,271 filings – a 39% increase from the previous quarter and a 139% increase from the prior year.
But this statistic alone does not necessarily foretell a foreclosure crisis.
That 139% increase in foreclosures figure might seem daunting but remember, foreclosures weren’t happening for most of 2021 because of the Foreclosure Moratorium (aka the foreclosure ban!)
Foreclosures weren’t happening because they couldn’t. And to keep this in perspective, Q1 of 2019 saw a total of 161,875 foreclosure filings.
High Inflation Rates
Rising interest rates mean it is more expensive for borrowers to take on homeownership. High-interest rates coupled with high housing prices mean that Americans increasingly spend more than before to be homeowners.
When mass amounts of people take out mortgages they can’t afford, a bubble burst is logically more likely to occur.
Supply Exceeds Demand
When there are more houses than people are willing to buy, home values decrease.
As it stands now, the market is facing quite the opposite problem. Demand for housing far exceeds supply, and it could even be years until inventory catches up. Some experts believe we’ll be waiting until 2024 to see pre-pandemic inventory levels.
Leading up to the 2008 housing crisis, the US saw an incredible uptick in the number of subprime mortgages.
Risky mortgages that people can’t afford are incredibly dangerous, but we aren’t seeing much of that in 2022. Thanks to consumer protection parameters, like the Dodd-Frank Wall Street Reform and Consumer Protection Act, mortgage lenders have stricter rules to prevent such defaults.
Risky Consumer Behavior
We can nip subprime mortgages in the bud, but it’s not as easy to regulate alternative financing.
As mortgage interest rates rise, buyers may turn to these, often riskier, alternatives.
According to a recent survey, approximately 1 in 15 borrowers, 7 million people, currently use alternative financing. In addition, the same study found that households with income levels below $50,000 were more likely to use alternative financing options.
So what is alternative financing? Alternative financing can include land contracts, seller-financed mortgages, lease-purchase agreements, and personal property loans.
While these financing systems are not inherently bad, they offer fewer protections for predominantly lower-income consumers. In addition, riskier behavior means an increased chance of taking on unaffordable financing agreements.
How the 2022 Housing Market Differs From the 2008 Housing Crash
There’s a lot of talk about when the housing market will finally cool, and if it does, if it will lead to a crash. Of course, we can never know how things will play out, but we can look at our past to understand where the future might take us.
Two main differences between the housing market that caused the 2008 financial crisis and today’s housing market: stricter lending rules and low inventory.
● Lenders have to abide by stricter lending rules that prevent mortgage defaults. As a result, fewer foreclosures mean a housing crash is less likely.
● It will take time for the housing inventory to catch up to high demand—there are no signs of plummeting home values for now.
How Homeowners Can Prepare For a Real Estate Market Crash
While we may not be heading for a crash, the market will undoubtedly cool off from the high of the past few years. Here’s what you can do as a homeowner to prepare.
1. Make wise purchases
There’s a lot of buzz around the real estate market, and for a good reason! But don’t let this pressure you into buying a home that isn’t necessarily the best for you.
Consider your needs, budget, and timeline before making any big decisions.
2. Stay within your budget
This tip is self-explanatory but worth saying.
The best way to protect yourself against a housing crash is to not get in over your head with your monthly mortgage payments. So if you’re looking to buy now, keep current interest rates in mind and consider looking for less expensive properties.
3. Make a sizeable down payment
The more equity you have in your home, the better off you will be. Equity is what you own outright on your home – so if you bought for $300,000 with a $280,000 mortgage, your equity is $20,000.
Doing what you can to put down a larger down payment increases your equity and helps you build wealth. And it can help protect you in the event the housing market crashes.
4. Build up your savings account
It’s generally a good idea to have at least six months worth of expenses put away for a rainy day. These savings can take care of emergency expenses and help soothe your anxieties in the case of a market crash.