Real Estate Market Crash Signs – Will the Housing Bubble Pop?
Lately, countless articles have been published discussing the housing market. Many have been doing so in rather black and white terms and with a level of certainty that may be unwarranted. We’ll break down what’s been happening in the housing market, what people are worried about, and the real estate market crash potential being discussed. Then, we’ll get into what experts are saying about all this and their predictions for the future.
What’s Happening with the Housing Market?
Housing prices have been experiencing sharp increases for quite some time now. In April of 2022, the median listing price for homes nationwide saw a year-over-year (YOY) increase of nearly twenty percent (19.1%). In total, according to data from the Federal Reserve Bank of St. Louis, the median price of US home sales has risen 33.83% since the first quarter of 2020. That’s an increase of $111,300.
In April 2022, pending home sales dropped 3.9%, while new home sales fell 16.6%. Both decreases exceeded those predicted by experts. However, new home sales dropped far more than they had expected. Furthermore, median home sale prices have continued to increase every quarter, but by slowing percentages. Due to these numbers, many have begun to worry that the real estate market is due for a crash.
What Factors Are Causing the Issue?
So, what exactly is causing home prices to skyrocket, why are price increases beginning to slow, and precisely what factors are causing people to fear that we’ve entered a housing bubble and are due for a crash? There are a number of reasons for each, and none of them is a sure thing. However, here is what we’re seeing now.
Let’s start with the reasons for pricing increases. Currently, the demand for homes is far outpacing the supply. The rise in demand was fueled by Millennials in their 30s entering the market to buy a home, low-interest rates making it more affordable to get a mortgage, and the pandemic causing people to require a home office space.
As more people sought to buy the few houses available, bidding wars drove up costs. Furthermore, the steady pricing increases led investors to buy houses in the hopes of flipping the properties for a hefty profit. This led to more buyers, fewer available homes, and even higher prices, exacerbating the problem.
Increased Interest Rates
Prices are rising at a slower rate as more people are priced out of the market. The Fed also rolled out the first of many expected interest rate increases, making a mortgage less attractive. Inflation also means people have less disposable income and many people are concerned that they may lose their jobs. With talk of a possible recession all over the news, many are choosing to be more fiscally conservative.
Potential Housing Bubble
So, why are so many people concerned about the possibility of the US being in a housing bubble? Well, as the Motley Fool pointed out, the factors we’ve discussed—along with buyers playing fast and loose with the kind of contingencies meant to protect them (like inspections and appraisals) in order to present the most attractive offer—can all be features of a housing bubble.
The fear of a real estate market crash is fueled by many factors like the anticipation of increased supply, interest rate hikes, and a possible recession on the horizon. International relations are also causing concern as Russia’s invasion of Ukraine has already caused economic issues and could have ripple effects on many aspects of the economy worldwide, much of which is uncertain.
What Do the Experts Say?
Every expert can interpret these signs slightly differently and alternate predictions for the future of each factor changes the possible outcome for the market as a whole. While one expert may see the slowing increase as a simple market correction and predict that it will stabilize, another could see the potential for a major crash and foresee home prices plummeting.
Basically, the field of economics is very complex and any prediction is uncertain. Any future event can change all of this in a heartbeat as well. With so many future factors up in the air right now and so much of what’s happening out of our control, that leaves a lot of room for error. However, here’s what experts are saying right now.
Many experts interviewed by Forbes believe that the housing market is likely to stay strong, at least in the near future. Their reasoning for this is that Millennials still represent a high demand for housing and Gen Z is poised to be in better financial shape when they hit 30 in a few years than Millennials were at that age.
They believe that despite predicted supply increases, it’s not possible for housing supply to catch up with demand, especially not that quickly. They also discourage people from comparing today’s situation with the state of the housing market in 2008. They point out that mortgages are held by people in better financial situations due to precautions put into place after the ’08 crash. While they’re generally optimistic, they do advise caution.
In a collection of articles by Business Insider, the majority of experts predict the market will cool down as interest rates increase and inflation raises basic food and gas costs. However, many believe the fears over the possibility of a housing bubble are overblown. Some even think there’s a good possibility of eventual price decreases of up to 20% somewhat into the future.
While most experts expect price increases to slow or worse, begin reversing, at least one believes it will stay strong with prices continuing to increase and disagrees with points made by the opposition. The expert, David Greene, says interest rate increases won’t have much of an effect due to such a dramatic supply/demand difference.
He also says that while others think supply increases and slowing population growth will help balance this out, he believes it’s not possible for any of those factors to change quickly enough to matter. He sees prices trending upward for quite a while.
It’s impossible to predict what will happen in the future with any degree of accuracy and all the experts seem to have conflicting opinions as of now on potential real estate market crash. The best thing to do is consider all the factors, think about the possibilities presented, analyze the best- and worst-case scenarios, and make the best decision you can with the information you have.
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