When is the housing market going to collapse? Experts weigh
Ask anyone who’s tried to buy a home in the past few months and they’ll tell you horror stories of record high prices and bidding wars that leave them empty-handed or paying way above the market. asking price.
With the housing market burning for almost a year now, people are starting to wonder how long the frenzy can last. The number of Google searches asking “when is the housing market going to collapse»Increased by 2,450% between March and April.
Homeowners today well remember how home prices rose and rose in the early 2000s, only to crash dramatically in 2007 and 2008, dragging the rest of the economy with them. But do rising house prices necessarily mean a bubble? And does a real estate bubble necessarily have to end in a crash?
“We are definitely in a real estate boom, and possibly on the verge of a bubble,” said Ali Wolfe, chief economist at housing consultancy Zonda. “But it can also be argued that today’s prices are justified given the fundamentals.”
What makes this housing market different?
Even though prices are rising, the real estate market today is very different from what it was in 2006. Back then, the price increases were largely due to speculation. An oversupply of housing and loose lending practices made homeownership easier. When prices inevitably fell, many borrowers got stuck with homes they couldn’t actually afford and ended up being foreclosed, leading to further price cuts.
This time, demand is fueled by historically low interest rate, but it is also influenced by demographics and lifestyle changes caused by the pandemic. This demand, coupled with a record level of inventory, is driving the rise in home prices.
First-time buyers are taking advantage of low rates to get into starter homes while moving buyers are taking advantage of the equity they have earned in their homes to buy larger, more comfortable homes in light of the new Work at home reality.
Not only are the causes different, but buyers today are also better prepared financially to deal with any housing market downturn, notes Christian Wallace, real estate manager at lender Better.com.
During the pandemic, the average credit score rose seven points to 710. Americans also managed to increase their savings to the tune of $ 1.9 trillion, meaning many saved enough for larger down payments. , which means they start with more equity in their home. and their monthly payments are more affordable.
Meanwhile, current owners earned $ 1.5 trillion in equity in 2020, according to CoreLogic. This means that, if for some reason people fall behind in their mortgage payments, most have options other than foreclosure, including refinancing or selling the home. According to Odeta Kushi, deputy chief economist at First American, for every 1% annual home price appreciation, there are 6,700 fewer foreclosures.
During the housing crisis, people with little equity ended up owing more on their mortgages than the value of their homes, causing some of them to vacate their properties.
Fortunately, lending standards are much stricter this time around, as banks and government regulations ensure borrowers can afford their home loans. For example, it is now much more difficult to get a loan without a down payment.
Could there be a “crash”?
In order to know for sure that the real estate market is in a bubble, the bubble must burst. And for there to be a dramatic drop in house prices, something would have to trigger a dramatic change in course in the housing market.
While mortgage rates are expected to rise for the rest of the year, most experts predict a slow increase. Even then, interest rates are expected to stay near their historic lows. Without a rapid rate shock, the worst that could happen, notes Noah Rosenblatt, co-founder of real estate analysis firm UrbanDigs, is that the housing market would gradually cool down.
“First, the offers go down, then, with a certain delay, the sellers adapt and lower their prices,” he explains.
Due to the severe shortage of homes for sale, Joel Kan, associate vice president of economic and industrial forecasting for the Mortgage Bankers Association, agrees that a sharp drop in prices is unlikely.
“With the shortage, we don’t expect there to be any kind of big drop in house prices because there is a lot of demand out there that can absorb any additional supply that comes into the market,” he said. Kan said.
What about those who may have overpaid for a house?
For some who may have paid well above the asking price, it is natural to worry about a possible real estate crash. But for buyers who aren’t planning on selling their home anytime soon, Rosenblatt says, there shouldn’t be a problem as long as you can comfortably afford the monthly payments.
On the other hand, buyers who have spread too far or taken too much risk could be the losers if the market has already started to moderate when they are trying to sell. Speculators looking to profit from the warm market could also incur losses if the market starts to run out of steam.
Ultimately, Rosenblatt is bullish about the housing market and doesn’t see the long-term effects of a potential “crash”.
“If the housing market does undergo a correction, I don’t think it will be a long time,” says Rosenblatt. “I think it’s going to be quick that just takes away the excesses that have happened in this cycle. This will eliminate the bad investment.