When Will the Housing Market Crash?

A major financial decision like buying a house can be more stressful during times of economic uncertainty. Even times of economic confidence may seem like the right time to let the bottom fall out. You don't want to risk your home as collateral damage.

"Buying a house is a stressful experience. There are always the 'what-ifs' in your head.

Based on current market conditions, it is unlikely that the housing market will crash soon. The real estate market's performance is affected by housing demand, housing supply and mortgage interest rate. At the moment, they are indicating a period of slow growth and not decline. This is certainly not the same as the 2008-2009 Housing market crash.

Are We in a Housing Bubble?

A bubble is a period of rapid value growth for an asset, in this case homes.

The rapid pace of the current housing market is a reflection of the COVID-19 pandemic. Based on Redfin data, home sales prices have shown that the price of homes has increased by double digits every month between August 2020 and mid-July 2019.

However, just because there is a housing bubble does not necessarily mean that there will be a massive and destructive burst. Reynolds states that it is a "minimal, small housing bubble". He explains that the low supply of homes on the market has been a significant cause of rapidly rising home prices, even before the pandemic.

Although mortgage interest rates have increased in recent months, which has put pressure on housing affordability and made it more difficult to find affordable housing, the decline in homebuyer enthusiasm has been quite measured.

Redfin's chief economist Daryl Fairweather says that a housing crash is not something to be worried about. "Even though mortgage rates were at 5.7%, prices didn't fall through the roof. Mortgage rates are now at 4.99%. It seems that the housing market has already taken the first hard hit from the new economy. As long as the situation doesn't get worse, it will be fine.

Fairweather points out, however, that home prices have either stayed the same or slowed down in growth month to month in nearly all U.S. markets. This is even though mortgage interest rate peaked at June. Since then, rates have fallen below 5%.

Fairweather explains, "What's really happening is that buyers and sellers are pulling away from this market. This means that there's less sales but that prices have remained stable."

What is the Difference from 2008's Housing Market Crash

Homeownership can be scary in times of economic uncertainty, especially if you are a living memory of the Great Recession or the 2008 and 2009 housing market crashes. Many homeowners were forced to foreclose in the first decade of the 21st Century due to predatory lending practices. Adjustable interest rates rose and the unemployment rate increased, further increasing the number of properties in foreclosure.

Reynolds states, "If you had a pulse, you could get mortgage back then." Housing demand was artificially supported by mortgages being issued to people who were not in a financial position to purchase and maintain a home. Buyer demand also dropped due to economic downturn. As a result, home values fell significantly.

Since the Great Recession, laws and regulations have been put in place to protect homeowners from predatory lending. Although rising interest rates and high home prices have made homeownership more expensive for many, qualified buyers are still looking for homes.

"There is a push and pull in the real estate industry as far as affordability. No one can afford it but there aren't enough houses to meet demand," Clark Kendall, president of Kendall Capital, a wealth-management firm in Rockville Maryland.

What does a recession usually mean for the housing market?

A recession is defined as at least two quarters of negative growth in GDP. It's usually accompanied by increased unemployment and decreased consumption by the general population.

A recession can lead to a slowdown of the housing market. Homebuyers might have to stop their search because they are worried about losing their job. There may also be an increase in foreclosure activity. However, higher unemployment will result in more people who cannot pay their mortgage.

Once the activity in the housing market slows down enough, mortgage interest rates fall to the point that buyers are interested in re-entering the market and getting a great deal. An increase in housing market activity, unlike the Great Recession of 2008, helps to lift the economy from recession.

Reports have shown that the GDP declined in both the first and second quarters of 2022. The decline was 1.9% for the first quarter and 0.9% for the second quarter. These conditions point to recession but it's a mild enough drop that many economists, financial experts, and others aren't quick in calling it a definite depression. According to the Bureau of Labor Statistics, unemployment is still low at 3.5% in July. However, corporations report gains.

Kendall states, "If this is a recession it's singular in the fact that... there are twice as many jobs as people who are unemployed so statistically that's an exception."

What are the conditions that could lead to a housing market crash or housing bubble burst?

Although current conditions do not point to a crash in the housing market, it is impossible to predict how the economy will perform over the next few months and years.

Several factors could cause instability in the housing market:

• Unemployment. While a slight rise in unemployment is acceptable, a fall to the bottom could indicate danger for the housing sector. Reynolds states, "That's what we're looking for signs of trouble." When there are too many people without work, distressed home sales rise and foreclosures become more common.

• Homebuilding. Since the beginning of the pandemic, builders have been suffering from labor shortages for over a decade. The availability and cost of raw materials has been a constant problem. Homebuilders might be nervous if there is a slight slowdown in buyer activity. Reynolds states that homebuilders could see this as an opportunity for them to stop working on their projects. This would exacerbate the housing crisis and increase the demand-supply imbalance.

• Buyer demand. Although housing markets may have experienced a slight cooling, demand is still strong due to the scarcity of homes available. Reynolds advises that you keep an eye on the demand and "whether it holds up over 12 months."

• Motivation of the homebuyer. The typical homebuyer doesn't want to purchase real estate in the hopes of seeing its value double within a short time. Kendall states that today's market is not cheap compared to two years ago, when housing prices and interest rates were lower. "I believe the person who buys a house should do so for the right reasons. You should buy a house to live in, not as an investment.