Expert’s Forecast What Is In Store For the Future of The Real Estate Market
The question on everyone’s mind right now; Is the housing market going to crash? Everyone is on edge because when the last time the housing market appreciated like this—it sparked a great recession that left a lot of people in a sticky situation. With rising interest rates the “crash” conversation is being brought up more often than not. Although we certainly can not predict the future, as your chosen real estate wealth advisor it is our duty to arm ourselves with the facts & data to best serve you as our client. We continually involve ourselves in trainings and meetings with some of the best real estate minds in the business to help our clients make the best financial decision based on data. So what are those facts? Let’s take a look at what is happening right now.
Google reported that “When is the housing market going to crash?” has been one of the hottest search topics related to the housing industry since March 2021. There are a lot of people out there that are anticipating history to repeat itself, just like the 2008 housing market crash. Speculations are running rampant about how and when the real estate markets could crash. We can look back at the 2008 housing market crash to learn a lot and see if the events that preceded the crash back then are similar to what we are experiencing now.
What Caused the Housing Market Crash in 2008?
The 2008 housing market crash ignited a worldwide recession. A huge reason for the crash was predatory private mortgage lending and unregulated markets. In the early-to-mid 2000s, mortgage lenders revised their lending standards of a desirable borrower which opened a window to borrowers with poor credit to get access to loans. The easing of lending standards created an opening for many to access mortgages even if they could not afford it. The high demand in the housing market propelled an increase in risky mortgage lending practices.
On the other hand, the Federal Reserve Bank raised the interest rate to 5.6 percent by June 2006. People with conventional loans were not affected but a majority of people with an adjustable-rate mortgage were severely negatively impacted. This lead people into unforeseeable debt, causing many people to default and thus leading to a huge rise in foreclosures in the market. The number of foreclosures spiked to a record high of 81 percent, in 2008. This led to an increase in inventory and thus, subsequently, a crash followed. Another contributing factor to the 08 recession was the stock market crash, which led to many losing their wealth. In fact, the major financial markets lost more than 30 percent of their value by September 2008, when the Dow Jones Industrial Average fell 777.68 points, which surprised 684.81 loss on Sept. 17, 2001, the first trading after the September 11 attack.
What Events Are We Experiencing Now Similar to 2008?
Now, back to our topic discussion, can you see the similarity in what is happening right now? Analysts have made their point: the federal government has had its say, different perspectives have been put forward in a bid to break down the events of the current housing market. So what is similar in what we are experiencing now that we also saw leading up to 2008
One of the biggest economic factors in the case of a free market like real estate, is the force of supply and demand. Frank Nothaft, a chief economist at CoreLogic, said a year ago, “We’ve got an acute shortage of supply on the market for sale at the same time that record-low mortgage rates are driving the appetite to buy by millennials and Gen-Xers.” We also have current homeowners and investors that are trying to capitalize on the rising demand and unprecedented appreciation. Right now, demand is being brought down by price growth, thus justifying the inverse relationship with the interest rates.
The “Housing Bubble”
You hear the term ‘housing bubble’ a lot, but what exactly does that mean? A housing bubble is created when the market price of residential real estate sharply rises (like 28.3% in one year). Usually, this happens when the demand for houses exceeds the supply in the market. The sudden rise of house demand triggers investors & speculators to enter the market to profit from future expectations. So, as we have seen in the last 2 years, many of those speculators entered the market, and in response, the home prices shot up, creating a bubble stretch in the housing market to grow even further. Now it reaches a time when the home prices are high up and no longer affordable to a good chunk of buyers. The unsustainability caused by the rising prices leads to homes being overvalued. In other words, price inflation. Which is where we are at right now. Utah is very unique in that our demand is extraordinary high compared to other states which offers a layer of protection. But as demand drops due to houses no longer being affordable and supply increases you have the recipe for another crash, but is that we we are seeing?
So Will the “Bubble” Burst?
Here in Utah, across the state, we have seen 28.3% appreciation in the last year. But when it comes down to it, even with that appreciation we are still seeing people purchase homes which inevitably makes it very difficult for the bubble to “burst”. Right now even with interest rates steadily increasing we aren’t seeing a big enough drop in demand to cause a frenzy that a crash is on the horizon. At this point, we would need to see the demand decrease while supply increase at an exponential rate for home prices to fall. When demand is exhausted, an equilibrium is restored, slowing down the rapid rise of the home price growth. When house price appreciation stagnates, those who depend on it to afford their home may lose their houses, bringing more supply to the market.
As stated earlier, interest rate and house prices tend to have an inverse relationship such that when the interest is low, price appreciation occurs, and the reverse is also true. Interest rates play a huge role in a market crashing. But it is important to note a big difference from now and then is that in 2006 before the housing market crash, many people were tied to interest-only and adjustable-rate mortgages, as they were initially cheaper within the first few years. Then when rates started rising it increased the monthly mortgage payment significantly. A majority of homeowners now are on a fixed mortgage rate, which means even with rates going up you will not be stuck in a sticky situation of no longer being able to afford your home. Thus we will more than likely not see an exponentially sharp rise in supply, making it difficult for the bubble to burst.
The Bottom Line
There are a million what-if scenarios out there and it is important to look at the facts and to not make decisions based off judgement. Often times panic is the reason for shifting the market into a worse case scenario than what was actually going to happen. It is evident that the U.S. housing market has been overheating in the last few years and in the last months it has become more apparent that the market is starting to cool down. But right now it is not cooling down enough to start worrying, we are talking about returning to a sense of normalcy like what we experienced before COVID-19. Remember when many people thought COVID-19 was going to crash the real estate market, and instead there was a sudden surge in the market. More homes for sale listings were done last year, with people rushing to buy homes in the suburbs. The rising homes for sale listings sparked the speculators to enter the market, further pushing the demand up and thus leading to a great year for all homeowners in terms of appreciation. Again, it is important that we reiterate that we can not predict the future, and you should prepare best for what fits your specific families needs. If you want to sit down and have a consultation with one of our real estate wealth advisors we would be more than happy to schedule and appointment with you! For now, know that every member on our team has not stopped buying real estate and has no future plans to do so!