Is a US real estate housing market crash on the way? Is it going to be as bad as the crash in 2008? WIll it just be a correction? Will the housing market continue to grow?
The truth is, no one can always predict the future with 100 percent accuracy. The best the experts can do is look at what happened in the past real estate housing market crash and make educated guesses about the future.
With that in mind, what caused past housing market crashes?
Past Real Estate Housing Market Crashes
The US saw several major economic crashes over the nation’s history. Some of these also hammered the housing market. A key player in several of these crashes, especially in the 2008 housing crisis, was a breakdown in lending, not just in mortgages.
2008’s fall was led by lenders making high risk mortgages to people with bad credit. People simply could not continue to make payments on their loans and foreclosures exploded.
The Lending Problem
So, do we have a speculative lending problem right now? No. Lending Tree says the mortgage market slowed down a lot after the Federal Reserve hiked the Key Interest rate.
Higher interest rates are making people less likely to borrow. Lenders are also paying more attention to loan applications.
Housing Shortage
Add to this the nation is current in a housing shortage. So, you might think that not enough homes on the market means houses should sell. Well, that depends on where the house is and what kind of shape it is in. Home Light says as 2023 started, it took 75 days for the average home to sell.
That is average. Some homes might sell within a few days. Some may stay on the market for a year or longer.
Home Light also reports this is a return to a historic normal. “For perspective, while the market is slowing from its white-hot status of 2020-2022, in historical terms, things are returning to more normal conditions. NAR reported average days on market in July 2011 was 98 days, and in 2012, it was 68, which at the time seemed quick on the heels of the housing crisis,” the article says.
Other Factors of a Real Estate Housing Market Crash
It is not just lending that leads to a housing crash. Unemployment, the Stock Market and the after-effects of war are historic factors as well. Right now, unemployment is down. Some places do have high unemployment numbers, but these areas are usually higher than the national average anyway.
The Stock Market is ticking along. Some people are going to the crypto currency market and a potential crash there hammering stocks. That is a legit concern says the International Monetary Fund (IMF).
The 2022 Bitcoin crash did not have long-term or far-reach effects on the Stock Market. It did cause a bunch of other crypto to tank. However, crypto is becoming more and more mainstream. Combine that with government attempts to regulate the electronic currency and the stock market and crypto will become more linked. What affects one will affect the other.
The US recently got out of the longest war in the nation’s history. However, that war was not the same kind of drain on national resources as some other wars. Ending the war in the Middle East should have no effect on the economy and by extension no effect on the housing market.
4 Factors for a Real Estate Housing Market Crash
Investopedia, an investment information website, says 4 key factors affect the housing market.
- Demographics
- Interest rates
- The economy
- Government action and inaction
Demographics is a fancy way of describing the population. It covers age, gender, income, employment status, where people live, population growth and reduction. In short, some people are more likely to buy a home than others.
Interest rates play a major role in home buying. In short, as interest rates rise, more and more people are locked out of the market. They simply can’t afford the payments. Here is an example. Let’s stay with round numbers to make this easy. The mortgage is $100,000 for 30 years. What are the monthly payments?
- 4% interest -> $477
- 6% interest -> $600
- 8% interest -> $734
Doubling the interest rate nearly doubles the payment. Going the other way, cutting the rate in half cuts the payment by nearly in half.
These payments do not include taxes, property insurance, mortgage insurance and other things like homeowner association dues and special assessments.
The economy is ticking along, but experts point to several warning signs that we may be headed for a downturn. Increasing tensions with China, a major US trading partner, Russia’s war with Ukraine and international oil production especially are making some forecasters nervous.
Bear in mind China has more to lose if the US economy tanks. The US is, by far, China’s biggest and most profitable single-nation trading partner.
Oil production is a big concern. As much as people drive gasoline-powered engines, the United States’ is highly dependent on diesel which powers international transport shifts and the railroads that shift products from ports all around the nation. Even inland ports rely on diesel fuel to get containers moved from the coast to the interior.
Hikes in oil prices drive fuel prices. As people spend more on gas and more on products that rely on diesel engines to get those products to stores, they have less money to spend on things like a new house payment. The current slowdown being linked to oil production was predicted in 2022 by Builder, a home construction industry website.
Inflation is also a major factor in how the economy is doing. The investment website Pimco has a good article explaining inflation and its effects.
A Crystal Ball
Looking into that crystal ball to predict the future is just guesswork. It may be educated guesswork by experts, but experts get things wrong too.
A crash is possible. A big monkey wrench that no one can predict is the next Presidential Election. This next sentence will make some people mad. The economy and market traditionally favor Democrat control. Look up the economic records under whichever presidents you like and compare them to the president before and after that person.
So, are we heading for a housing market crash soon? Las Vegas-style odds are against a crash in the next few years but in favor of a continuing slowdown. The demand for housing is strong, homes are selling, and the economic forecast remains good.
Staying Safe in a Real Estate Housing Market Crash
You can take steps now to be ready for a crash. Here are some steps to take.
- Don’t buy a new house right now unless you must. Of course, if you are moving a long distance, you do need a new place to live. But just getting a new house because you think you need more space or you are tired of where you live is a mistake, unless…
- Buy a new house if you live where you need to live and can get a lower mortgage payment or, better yet, no payment. If the kids are gone, downsize.
- Put down as much of a downpayment as you can. This has a direct effect on your mortgage payment by lowering how much you need to borrow.
- Build some emergency savings. Most Americans do not have this. Cutting expenses is never pleasant, but if it lets you build cash reserves, that is good.
- Do not refinance unless it results in a lower mortgage payment. Unless you are 10 or more years into your mortgage, a refi right now is likely not a good idea. The key is to get a much lower payment, not just a few dollars. Try to cut the payment by at least 1/3 or more.
- Invest in real estate. It may sound counter-intuitive, but it works. If you live in a place witha high demand for housing, that means people are looking for a place to live. If you can buy property with a low-enough, or even no monthly payment, you can make money by renting the property or by flipping it. Get a rental management company to handle the renters if you are uncomfortable. They will tack their fees onto the rent you want to collect.
Get Help! If you are worried about your housing situation or how to survive a crash in the next few years, let’s talk. I may be able to set your fears to rest.