A crucial financial choice, like purchasing a home, may become more stressful during economic instability. Even prosperous economic times might look like the ideal moment for the economy to tank, and you want your house to avoid unintended consequences. Although prices in the housing market have been falling nationally since mid-2022 under rising interest rates, analysts note that a quick and sudden housing market catastrophe is unlikely, given the sector’s current state. Housing demand, housing supply, mortgage rates, and unemployment influence the real estate market’s performance. These factors point to a period of slowdown in some industries and growth in others but a decline in overall transactions that is unquestionably not as severe as that experienced during the housing market crash of 2008–2009.
You should be aware of the following information on the current housing market and the signs that indicate if a crash is imminent:
- Is there a housing bubble today?
- Prices can drop without experiencing a collision.
- What has changed since the housing market meltdown of 2008?
- How does the housing market fare during a recession?
- What factors might cause a collapse in the housing market?
Is there a housing bubble today?
A bubble in economics is described as a time when the market value of an asset—in this example, homes—proliferates. Quick market value increase correctly reflects the home market up until around halfway through 2022, given the rapid speed of the real estate market, which has lasted nearly as long as the COVID-19 pandemic. Based on house sale price statistics from Redfin, the home price rise was in double figures year over year monthly from August 2020 through mid-July 2022. However, there may be little evidence of a developing housing bubble. Since the summer of 2022, prices have decreased from month to month. Even while housing prices are still rising annually as of December, Redfin reports that the growth was just 1.8% greater than in December 2021.
A wealth management company with its headquarters in Philadelphia, Glenmede, employs Mike Reynolds as vice president of investment strategy. “We’re looking at housing values right now and think they’re a touch overextended, nonetheless, of what they ought to be, given mortgage interest rates,” he says.
Mortgage rates frequently rise or fall due to the Federal Reserve’s operations, even though they are supposedly independent of the federal money target rate established by the central bank. In a concerted attempt to control inflation, the federal funds’ benchmark rate has increased many times in the past year. According to Freddie Mac, the average interest rate for a 30-year fixed-rate mortgage fell to 6.13% as of January 26 by over 7% during October and November 2022. Despite a minor decline in mortgage rates, many prospective homebuyers are keeping away since high housing prices still limit affordability. As homebuilders scale back plans for significant development and home sellers inject the brakes, they choose to remain in their current homes instead of taking on a greater mortgage interest rate. The low supply of homes on the market, which has been a significant contributing factor to rapidly rising housing prices even before the pandemic, remains low.
Home prices may eventually fall year over year due to a lack of demand, but the housing bubble may not necessarily collapse. Reynolds hypothesizes that a restoration to equilibrium, where houses are pretty priced to be affordable to buyers, is more in line with what he anticipates. However, Reynolds believes that an actual rupture is unlikely this time. “It’s feasible that a little air is let out of the bubble,” he adds.
Prices can drop without crashing.
The quantity of house sales has dramatically decreased. According to Redfin, over 37% fewer properties were sold in December than in December 2021. However, any decline in property values may not become more worrisome since homeowners can now wait out rising interest rates and economic uncertainties. According to Jarred Kessler, CEO and founder of EasyKnock, a firm that offers an alternative to equity loans, markets that had higher home price rise in recent years are more susceptible to more significant declines as prices adjust to align with long-term demand. He anticipates that locations like Austin, Texas, Nashville, Tennessee, Miami, and Phoenix, where prices rose quickly and sharply relative to other regions, would experience 10% or more price declines.
Prices have significantly increased, and several of those locations had numerous institutional purchasers who have scaled down, according to Kessler. The so-called “iBuyers,” or real estate speculators aiming to earn significant profits by purchasing single-family houses and flipping them, have curtailed or discontinued operations in several of the most well-liked locations.
What Has Changed Since the Housing Market Crash of 2008?
Any time the economy is uncertain, owning a home may be frightening. This is especially true if you have recent memories of the Economic Downturn and the property market crisis of 2008 – 2009. When adjustable interest rates surged in the early years of the twenty-first century as a result of predatory lending practices, many homeowners faced foreclosure. Unemployment also increased the number of houses in foreclosure.
The housing market was artificially stimulated by giving mortgages to those who couldn’t afford to purchase and maintain a property. The economic slump also caused a sharp decline in buyer demand. As a result, home prices drastically decreased. According to Rick Sharga, executive vice president of market information at Irvine, California-based ATTOM, a real estate data provider, the present scenario is substantially different from that before the Great Recession. According to him, mortgage delinquency rates are reduced than before COVID. He adds that, historically speaking, 2019 was a quiet year for foreclosure activity.
According to Sharga, 93% of borrowers now facing foreclosure have positive housing equity, giving these struggling homeowners a few possibilities for a “soft landing.” According to Reynolds, the supply issue is another significant distinction between the current market and the housing catastrophe. Excessive construction before 2008 ensured that when demand fell, there were large house projects that lay unoccupied. By 2023, housing will still lag due to the Great Recession’s low rate of building in comparison to household formation. The number of dwellings per household has decreased, according to Reynolds.
Since the Great Recession, regulations and laws have been established to protect today’s homeowners against predatory loans. There are still more eligible buyers looking for houses than homes for sale, even while high home prices and increasing interest rates have raised the entire cost to buy a home and made homeownership unattainable for many otherwise would-be homebuyers. For these other reasons, Reynolds claims he and his team believe “a crash at this moment is unlikely.”
How Does the Housing Market Usually Be Affected by Recessions?
A recession is defined as at least two quarters in a succession of negative GDP growth, and it is frequently characterized by higher unemployment and lower overall consumer spending. The housing market slows down due to the financial hardship people experience during a recession. Homebuyers may put off their search if they are concerned about being laid off, and there may be a slight increase in foreclosure activity as rising unemployment rises the number of people who cannot pay their mortgage.
However, after the property market’s activity slows down sufficiently, mortgage interest rates fall to the point where purchasers return, looking for a good offer. Contrary to the Great Recession, a rise in property market activity aids the economy’s recovery. Following the Bureau of Economic Analysis, the real GDP grew in the third and fourth quarters of 2022 by 3.2% and 2.9%, respectively. Additionally, the Bureau of Labor Statistics reports that unemployment was only 3.5% in December, which is still relatively low. Even though these indications do not point to a recession, the Fed’s activities in 2022 have led most analysts to predict that a recession will occur in 2023. Kessler predicts that the recession “will be brief, but it will be a recession.”
What Factors Might Cause the Housing Market to Collapse or the Housing Bubble to Burst?
Although the housing market’s current state does not indicate a crash, no one can predict how the economy will perform in the coming months or years. Several elements that can cause the housing market to become more unsteady include:
- Unemployment. A slight rise in unemployment would be OK, but a bottom collapse may be a sign that the housing market is in trouble. When too many individuals are without jobs, distressed house sales increase and foreclosures are more likely to occur.
- Homebuilding. Since the onset of the epidemic, the cost and availability of supplies have been a persistent problem, and builders have been beset with skill shortages for ten years. Builders are slowing down, and fewer permits are being issued for constructing new homes due to the decline in buyer activity. This might prolong the housing scarcity and exacerbate the supply-demand gap.
- Consumer demand Although real estate markets have cooled a little, demand hasn’t gone away and is still high in many areas, partly because there aren’t enough properties on the market. The absence of any consumer demand would indicate a problem.
- Buying Motivation, The average house buyer should not purchase property now with the hope that its value will increase double shortly. Kessler suggests purchasing to stay for at least five years. Don’t worry about the noise now and then, adds Kessler, if you can afford to reside there.
