The housing market in the United States is worth close to $36 trillion.
There was a surprising boom in 2020. Pandemics don’t happen often, and when COVID-19 hit, everyone was filled with uncertainty. Many industries got hit hard and are still struggling to recover.
The real estate industry was not one of them. Over the past few years, we have seen the industry grow rapidly; however, the speed at which it’s growing is not sustainable. You’ve probably heard many different predictions about if the housing market collapse will happen in the coming years.
If you’re an investor, you need to know what’s coming so you can prepare to expand your portfolio. In this article, we will talk whether there will be a housing market crash. Read on to learn more.
The housing bubble is created when there’s a high demand for homes but supply is low, which leads to price increases. A housing bubble can last years and make it challenging for the average homebuyer to purchase a home.
The prices rise to a level that is not ideal or sustainable. The bubble doesn’t last forever and needs an external factor to burst, which we will discuss later.
There are signs that we are currently in a housing bubble. When people begin to purchase homes rapidly because they speculate the prices are going to continue to rise, is when the bubble gets larger.
People are afraid that the cost to buy a property is going to keep increasing and they will no longer be able to afford to buy a house. This leads them to pay well over market value. The main issue is, that supply can’t keep up with demand because artificial factors are driving it.
What Drivers the Bubble
Many factors can cause a housing bubble to form which can quickly lead to a housing market downturn. Typically there will be more than one external element that propels sustainable growth.
Low interest and mortgage rates make purchasing property more affordable, encouraging people to invest. This one is driving our market right now. At the beginning of the pandemic, no one knew how the housing market would be affected.
The government wanted to avoid a mortgage market crash so they lowered rates as an incentive. People took advantage of this and started investing; however, inventory was low.
Therefore creating the bubble. A few more drivers include:
- Increase in economic activity
- Increased risk-taking by investors
- Low underwriting standards
- Low mortgage lending standards
What Pops the Housing Bubble
We will see a real estate market downturn right before and after the housing bubble burst. Similar to growing the bubble, the downturn will be caused by external agents. For example, if the general economy takes a turn for the worse, it affects demands.
People will have less income to spend on a property. When interest rates increase, which we’ve seen in the last few months, people tend to hesitate when taking out a loan. An increase in interest can also make it challenging for homeowners to keep up with their current payments.
It is becoming more challenging for people to afford to purchase housing, as the prices are increasing so fast. This directly affects demand. Eventually, people won’t be able to afford it at all and only a few people will be looking to purchase property, causing the bubble to pop.
When supply and demand reach the same level, that’s when the market becomes sustainable again. At this time, in our current market, prices are still increasing, and demand is still high.
This indicates that the bubble is still growing and the housing market collapse could be approaching. It’s hard to say when exactly the bubble will burst and the market will take a turn.
When To Jump In
Knowing when to buy and sell can be difficult, primarily if you haven’t studied the market. When the market takes a turn for the worse, it can be hard to sell your property because demand is low. Sometimes you don’t have the luxury of waiting for the market to pick back up again.
When the market is at its peak, you may want to sell since you’ll get above-market value for your property. However, be sure to consider how much you’re going to have to spend to find another home. Selling can be a great option if you’re moving to an area with a less competitive market or somewhere with lower prices.
The housing market took off at the beginning of the pandemic. Now people are worried about a downturn in the housing market.
Understandably, interest rates are increasing and demand is still high, but it is starting to slow down. The idea of a housing market downturn is scary; people don’t want their investments to lose value. However, the rate at which the market is currently growing is not sustainable.
There are a few reasons, besides the low mortgage rates, that the housing market got so hot when it did. There was an increase in first-time homebuyers. In 2021, 34% of purchases were made by first-time homeowners, which is an increase from 2020 and 2019.
Many states and cities already had low housing inventory and then thousands of people migrated there. For example, more than 300,000 people moved to Florida in 2020 and 2021. Demographic shifts played a big role in the demand for housing in the last few years.
Why Prices Fall
Prices will fall in the future as people won’t want to pay or unfortunately won’t be able to afford the high mortgage rates. You’re probably wondering what a potential market slowdown means for buyers and sellers. Well, sellers could struggle to sell their properties promptly and buyers may have trouble finding a property to purchase.
Reasons It May Not Crash
While many professionals believe a housing market downturn is coming, some aren’t so sure. There are a few reasons why the market may continue to grow in 2023.
Demand Is Still High
First-time home buyers account for about one-third of property purchases. There are still thousands of Millenials that are looking for their first home.
The next generation, Gen Z, is also following close behind. Rent prices are continuing to increase, encouraging more and more people to buy instead.
Supply is Low
Supply and demand run the industry. There wouldn’t be a problem if supply was high and demand was high, but it’s not.
Supply is low, which increases prices and increases demand. Many experts say this factor will keep the market booming for the next few years.
High Credit Scores
Lenders learned their lessons after the housing market crash in 2008. Many people defaulted and everyone lost a lot of money.
Now lenders are more careful about whom they give loans. Many home buyers have high credit scores, which means they are less likely to default on their loans.
When To Buy An Investment Property
Knowing when to buy an investment property can be challenging. There are many things to consider and it can take time to find the right one.
First, you’ll want to sit down and evaluate your goals. Your short-term and long-term goals will play a role in which property you purchase. You’ll also want to look at your finances.
This will be one of the most limiting factors. With an investment property, the majority of lenders will require you to put in 20%.
Be sure to look at different locations around the country. Some places may have surprising benefits and great deals.
You’ll also want to look at the numbers before buying. While your calculations may not be 100% right, as a downturn in the housing market could happen anytime, it’s good to have an idea. A good rule to follow is the 1% rule. If you can charge your tenants or make 1% of the purchase price a month on your investment property, you should be able to make your mortgage payments.
If you already have an investment property, you probably know how much work it can be. Managing one property is much easier than operating two or more. Each investment property that you add to your portfolio is going to require more work. You’ll need to be prepared and ready to take on that responsibility.
Challenges Builders are Facing
New construction homes make up a big part of housing marketing. Contractors can’t get homes built fast enough to keep up with demand. They are facing many challenges, one of them being supply chain issues.
The cost of materials is increasing and it’s difficult to get the materials ordered and delivered on time. Typically, in the past, supplies would be ordered when they were needed. Now it can take weeks to get materials which slows down the projects and cost the contractor more money.
Hiring employees is another challenge that affects the housing market. The pandemic forced a lot of people out of their jobs. Even two years later, it’s hard to find quality workers.
Builders are also having a hard time finding lots to build on. While others may be able to find the land but struggle to get a loan. As interest rates go up, it’ll be even more difficult.
As we mentioned before, it is hard to tell when the market will fall. However, a downturn is likely to happen in the coming years. We may not see a big change this year or even in 2023.
2024 and 2025 will likely see fewer people buying and selling homes. If you’re an investor, buying during the downturn is key to making a profit.
Our housing market is also affected by the global economy too. The war between Russia and Ukraine could cause a spike in prices and cause supply chain issues, which were already experiencing. An increase in inflation due to global political conflicts could cause the market to downturn as well.
Researching different cities and states can also be helpful if you’re selling your house and moving. There is higher demand in some parts of the country.
Owning a home comes with a lot of responsibilities, but it does have great benefits. Selling a home can be even more overwhelming than purchasing one, especially if you need to sell it quickly. Selling before the real estate market downturn can ensure you get a good price.
If you’re trying to get your home sold quickly, you may not have time to search out buyers and find a real estate agent. The good news is some services will give you offers on your home.
You won’t stage it or repair any damage. Many resources can help you sell your home in any market.
Is The House Market Crashing?
As we know from experience, the market can be unpredictable, but whether the downturn in the housing market is in the near future or not, it’s important to be educated and prepared.
The COVID-19 pandemic has affected nearly every aspect of the American way of life. For many, the change has been positive as people have been able to spend more time with their families and friends. However, that feeling has not been shared by all, as the effect of the pandemic has also been huge on our economy.
As such, the question on many people’s minds is if the housing market is crashing and is that the effect the pandemic is having on the industry? If you want to know how much you would get for your house in this market, submit your address to get started.