Since the housing market has become hot, it is only natural for people to wonder if the housing market is going to crash because of the increasing prices. We all remember the market crash of 2008, and we don’t not want to lose all of our hard-earned money in something like that again.
First, I just have to mention that there are those people who have been saying the housing market is going to crash for years now. I’ve been hearing it ever since I got my license a few years ago. When I listen to their reasoning, it seemed like these people were hoping for one of two things. One, they are just negative people who always think that something bad is going to happen. They would rather just stay in their shell and stay what they believe to be “safe”. Two, they are actually hoping that the market would crash, because they want to get a deal. They are hoping prices will go back to 2008-09 levels so they can buy a home for 50% off. This is a bad mindset to have for a few reasons.
I would be cautious about listening to anyone who is actually hoping the market will crash, because if that happens, everyone is negatively affected by this. It’s not just home prices that will drop. People will lose their jobs and livelihoods. Savings will be wiped out. These people are pretty much wishing for something that will hurt them just to get home prices down. The irony of this is that even if that did happen, they most likely still won’t be able to afford a home, because their income and savings will be affected as well!
For those who just always want to sit back and play it safe, just remember that no one is safe from inflation. If you don’t save your money and invest in something, your money will slowly lose its value. At a certain point, making money will always involve some sort of risk. No risk no reward.
Forbearance
The big argument about why the housing market will crash soon is because of the number of homes that are in forbearance. When a home is in forbearance, it means that the lender has allowed the person to temporarily stop making their mortgage payments. According to the Mortgage Baker’s Association (MBA), there are around 2.5 million homes that are in some sort of forbearance. This has happened because there were a lot of jobs that were lost because of the pandemic, so people were unable to pay their mortgages.
These forbearance programs were designed to last for about a year and a half. So for those who applied for a forbearance when the pandemic started in March 2020, these programs will end around September of this year. Once that happens, if those home owners aren’t able to pay their mortgage, they will eventually foreclose, flooding the market with distressed properties and crashing it.
Before I get into my reasoning on why I do not believe the market is necessarily going to crash, let me first explain the circumstances of the housing crash of 2008, and how today’s circumstances are different.
What happened during the housing crash of 2008?
Loans were a lot easier to qualify for. Income was not verified, and there many loan options out there that didn’t even ask for a down payment. This means lenders were making loans out for 100% of the loan value, and people had no equity in their homes. Once prices dropped, all of these homes went under water, and you know the rest.
The real problem
The main issue with today’s market is not that prices are rising high. The main issue is that there are simply not enough homes for sale. New home construction has been a lot slower in the past few years, and there are not enough homes to meet the demand of all the new first time home buyers coming onto the market. Since there are not enough homes for sale, people will fight over the remaining homes that are for sale, and they are willing to pay more because good homes are scarce. Until the supply of home reaches the demand, home prices will continue to rise.
Why the market won’t crash like 2008
-Lenders still have strict requirements and are making relatively safe loans. Lending requirements are much stricter today. Lenders are required to verify your income as well as your credit, and they require a lot of documentation. Loans are a lot safer today than they were in 2008.
-Housing inventory is still very low, and predicted to stay low for the foreseeable future. The number of new construction homes slowed down after the Recession of 2008. Now that the demand for homes has risen, builders have not been able to keep up. Builders and new housing have to catch up with the demand, and that could take a few years for that to happen.
-On April 28, 2021, the federal reserve announced it wouldn’t raise the interest rates, and that they don’t plan to raise the interest rates at least until 2023. Since interest rates and mortgages will remain cheap for the near future, the demand for housing will remain high. Inventory remains at record lows, which is causing prices to rise. If this keeps up, prices will continue to rise until the lower end buyers can no longer afford to buy a home. Once this happens, prices will simply plateau, or stop rising at such a fast rate. In other words, if you think prices are high, they will only continue to increase even more at this current pace.
-If there are a lot of forbearances that lead to foreclosures, inventory is so low that it will only help satisfy the extremely high demand of buyers out there looking for a home. Worst case scenario is that home prices plateau and even out faster, but it shouldn’t cause the market to crash and home prices to drop severely. There are simply too many people out there who want to buy a home.
In conclusion, there aren’t enough homes for sale to meet the demand. Until that problem is solved, the housing market is likely to stay strong. Feel free to reach out to me here with any questions or comments. Thanks and have a great day!