In real estate, there can be a lot of highs and lows. People are always speculating on a housing market crash. Sometimes it is a buyer’s market, meaning buyers dictate pricing. How that happens is when you see a trend in houses sitting on the market for long periods. With little showings and maybe no offers. If you are noticing this, that means buyers have full control. Then, in a seller’s market, you may see properties flying off the shelf. With little time on the market and multiple offers above asking. This means you are in a seller’s market. Allowing the sellers to dictate the terms.
No matter what market we are in, if we notice one side of things tipping too far to one side, we assume the worst. In reality, it can be difficult to predict a housing market crash. Plenty of experts claim they notice trends such as high mortgage rates with slow sales of homes. Maybe even a lot of defaults on mortgages. Whatever the experts notice, it’s still hard to predict a crash in the market. In this article, we’re going to give you a better understanding of what a housing market crash may look like.
What is a Housing Market Crash?
A housing market crash is considered when home prices begin dropping at an alarming rate. You may notice in your area a home a year ago for over $400,000 in less than 21 days. But now a similar home in that same area struggles to sell and has to do massive price cuts. You may also notice plenty of homes in your area just sitting on the market. With little to no offers being presented. There are also lots of foreclosures that start happening. People begin going into default on their mortgages.
How does a Housing Market Crash Happen?
- High mortgage rates: One of the most common things we notice is a spike in mortgage rates. When there is a sign of a housing market crash, we notice long periods of high mortgage rates. Sometimes we will see these rates high for long periods. It is the feds trying to cool down the market and slow things down.
- Economic problems: Another sign of a housing market crash is economic problems. We may notice issues in things like the stock market or even supply and demand. The economy works as a well-oiled machine. If there is an issue with one system, then the rest tend to follow.
- Too much inventory: We may notice too much inventory in one area at a time. For instance, in Philadelphia, you may see areas where too many investors have moved into an area, fixing homes up and putting them right on the market. If the area cools down and fewer buyers move into that area. You may start to notice homes sitting and investors start defaulting.
- Foreclosures: Another huge cause is large amounts of foreclosures or defaults on mortgage payments. Plenty of people may buy a house thinking they can afford a mortgage. But sometimes they don’t account for their monthly payments and may default. Just like investors possibly investing in a stale market, causing them to not be able to resell that home.
Effects of a Housing Market Crash
When a housing market crash happens, plenty of people get affected by it. It could cause issues with borrowers. Say you default on your mortgage, and you get put into foreclosure. You will not be able to get rid of that foreclosure from your record. Preventing someone from being able to buy a house for at least seven years. As well as the lender who is lending the money, sometimes there is not enough equity in the property for the lender to resell.
It could also have an effect on the economy. If the housing market crashes, it could cause issues in the economy. Such as job losses, financial instability, and recession. It was seen to cripple the economy in 2008.
Ways to Avoid the Crash of the Housing Market
There are plenty of ways to avoid a housing market crash from a lender’s and borrower’s point. Lenders have put in place plenty of restrictions when it comes to issuing loans.
- Credit score requirements are a huge thing that lenders have in place. They will not allow you to even apply for a mortgage if your credit score is not above 620.
- You need to make a certain amount of money each year to even get approved for a mortgage. Unless you make over $30,000 a year, you might not even get approved for a mortgage.
- If you are looking to get a loan as a borrower, it is always best to figure out your finances. Lenders require a certain loan-to-debt ratio to be approved for a loan. As a borrower, you need to speak with a lender and figure out, after bills, how much you can afford.
There are plenty of ways borrowers can sit down and go through their finances. Then speak with a lender, crunch numbers on their price range, and find out if they are in the best situation to buy a home.
Is it Possible for the Real Estate Market to Crash Again?
No one has a crystal ball to see the future, but anything’s possible, including another housing market crash. Several times in the 1800s, there was a housing market crash. As well as during the great depression in the early 1900s, followed by one in the 1990s, and the most know in 2008. Anything is possible to repeat itself.
The state of the economy will be a huge factor if things are on track to crash. As of recently, there are a lot of signs pointing towards another crash. With interest rates staying as high as they have been for a while. Demand is very short in some areas. Also, other areas have too much inventory, with property sitting vacant on the market. Plenty of signs are pointing toward a housing market crash, but you would hope that society has learned its lesson from all the other times.