When Will the Housing Market Crash?

The short answer is, "It probably won't." 

Experts agree that the huge boom we're now seeing will not result in a crash like the 19.2 trillion loss of over a decade ago. It will be more like a balloon gradually deflating than a deafening "Pop!" that shocks the economy and the real estate industry. 

Yet, real estate professionals and homeowners are concerned. Searches for "When will the housing market crash?" were up more than 2,450% on Google in April 2021.

What goes up (like housing prices) must eventually come down and what goes down (like mortgage rates) must eventually come up. Real estate history confirms that. The speed and timing of that roller coaster are what's open to debate.

Signs Point Toward Stability

The consensus across a wide range of real estate industry media is that we will not be seeing a crash any time soon. In fact, the lessons we learned from years past, combined with a spirit of optimism in the real estate market, may actually prevent a dire situation. In addition, the current administration is very aware of the perils of irresponsible mortgage lending and has taken steps to monitor and prevent a repeat of 2008.

Consumer confidence has risen to a 14-month high as the U.S. rebounds from the COVID-19 pandemic. Employment is on the upswing, and people of all ages are making thoughtful housing decisions, assisted by real estate brokers, agents, and lenders. 

How 2021 Is Very Different From 2008    

The last housing crash was caused by a combination of irresponsible lending and low interest rates. Today, we're seeing a lack of housing supply and low rates causing a severe lack of inventory. Experts believe that this will begin to turn around over the next decade to alleviate some of the inventory pressure. Recent ideas for addressing the shortage even include turning vacant office buildings into residential units.

In addition, many more mortgages in 2008 were adjustable-rate loans, causing significant financial pressure on households when the rates increased. Today, adjustable-rate mortgages (ARMs) make up less than 10% of home loans, whereas they accounted for more than 50% during the last crash.

Lenders have become more responsible and thoughtful, and consumers have grown more risk-averse, perhaps as a result of the previous fall-out. Technology has enabled lenders to screen mortgage applicants more carefully, and consumers are aware of the dangers of taking on more debt than they can handle. As a result of the 2008 crash, both lenders and homebuyers are more cautious than in the past. Lenders also face more scrutiny and regulations than during the financial crisis and behave more responsibly.

We're also seeing a healthy economy this year, along with a wide range of programs that will help keep financially challenged homeowners from going into foreclosure. In fact, they may be able to walk away from their homes with a significant profit due to the lack of inventory.

But the wildcard is always what will happen to interest rates over the next few years. Experts believe that average fixed rates this year will hover around 3.5% and gradually creep up to the 4% level in 2022. These increases will start putting downward pressure on prices eventually.

Housing Market Predictions for 2021

Still, real estate industry experts are confident that we won't see a huge adjustment this year. Some of the trends that we will see in this market are:

• Younger generations will step into homeownership. Now at 38% of the home-buying population, this group is investing in real estate and taking full advantage of lower rates to buy more expensive starter homes. 
• Home prices will continue to rise throughout the rest of the year. Prices are up about 19% over last year and, because of low rates, people who were contemplating buying are jumping into the real estate market. Lumber shortages will also drive up the cost of new construction. 
• Buyers will move to previously untapped geographies, as the work-from-home and remote-hiring trends precipitated by the pandemic open up a wide range of home-buying opportunities for consumers and investors. 
• Although the housing shortage will take a while to fix, progress is being made. Over the past 25 years, the number of homes in the U.S. rose by 25%, but the population rose 24%, according to data from the U.S. Census and the Bureau of Economic Analysis. Although this doesn't seem like a problem, the total housing inventory doesn't factor in the types of homes being built. Builders must match the types of homes they're constructing to population trends (like the aging population and the move to smaller families, which necessitate more homes per capita). New construction is on the upswing, with 1.7 million housing starts in March, a 19% increase over the prior month.

What Should Brokers, Agents, and Investors Do?

Although experts are not worried about a housing market crisis, they do talk about "an inventory crisis." More homes may become available later this year. As more people are vaccinated, they may be more comfortable making moves. As mortgage relief programs end, homeowners may finally decide to trade down to more affordable properties.

Real estate professionals need to remain smart, nimble and focused on serving the needs of their clients as they build new relationships. Here are a few ways to stay ahead of the curve:

• Stay informed of trends and predictions.
• Continuously research new neighborhoods and use state-of-the-art technologies to find new listings and potential clients. What types of investments (buy and hold) are appropriate in today's economic climate? What areas/markets are most likely to suffer the least in the case of a crash? Those properties that have appreciated the least can more likely withstand a market crash.
• Differentiate yourself from other real estate professionals. Some experts predict that the number of brokers and agents will decline in the years ahead as more buyers and renters turn to technology to close deals. Use your knowledge of the real estate market, home values, and lending options in your community to build solid relationships with current and prospective clients.
• Investors and flippers should likewise use all the data at their disposal to make the best decisions about the potential homebuyers and renters of the future.

In short, a spirit of cautious optimism is warranted for the next couple of years. No one in real estate can predict the future with 100% accuracy, but by staying informed about the facts and data, we can avoid repeating the past.