Anyone who has taken even a glance at real estate in recent months knows just how hot the market has been. Home values have increased by double digits, in some areas of the country by more than 30 percent since early 2020. Buyers are frustrated by the few homes available on the market and those that are listed sell quickly. All of this activity has many people wondering when the next real estate crash is coming. But is one really coming?
The truth is, a crash doesn’t always follow higher home prices. For those people who lived through the 2008 Great Recession, they witnessed a collapse in home values, in some cases by more than 50 percent. As a result, many people are comparing the current market with that period. But the two periods are very different, so it’s important to know why one experienced a crash and the other likely won’t.
First, the 2008 real estate crash came as a result of risky lending that made borrowers vulnerable to defaulting on mortgages. Lenders were not properly vetting borrowers, lending them far more than they could afford and in some cases allowing them to borrow without putting money down. The frenzy in house buying came as a result of demand created by a flawed lending process. Anyone who wanted a home could buy one, whether they had enough income or not.
Expensive home prices:
Home prices soared with the flood of buyers competing to purchase houses that were bigger and more expensive than they could afford. The crash came when those buyers couldn’t afford to pay their mortgages and the value of their homes plummeted below the amount they owed. Home owners defaulted on loans, banks foreclosed on them and the real estate market became flooded with foreclosed homes for sale.
High real estate prices:
Today’s high real estate prices are also a product of demand from buyers, but the lending rules and laws have changed significantly. Even the way a house is appraised has changed, making it a more realistic estimate of property value. While increasing quickly, today’s real estate prices are not artificially inflated as they were before the 2008 crash by questionable appraisal and lending practices. The higher values today also are a result of buyers purchasing a home to live in, not just an investor speculating on an asset as they did before 2008. Many purchases today are driven by a desire to move into a different home, perhaps in a different area, all prompted by the legacy of the COVID-19 pandemic.
While it’s not likely that housing values will continue to increase at the hectic pace seen in 2021, it’s also not likely that the real estate market will experience a crash, particularly along the magnitude of what was experienced in 2008. Instead, what will probably happen is, prices will level out at a higher value, and may even decrease slightly, but not crash. In some areas of the country considered popular retirement destinations, such as Florida, the demand will likely continue for years to come, and prices may have increased appropriately on real estate that previously was undervalued.
Prices will likely stabilize or decrease slightly as housing inventory improves, which some areas of the country are already experiencing. For now, interest rates are expected to remain relatively low through 2022 because the Federal Reserve has said it plans to keep the prime rate low that banks use to loan money to each other. The supply chain problems making it difficult for home builders to find construction materials are getting better, but haven’t been fully resolved. That means builders won’t be able to satisfy housing demand, which should mean sale prices could continue increasing for new construction. That has a ripple effect on existing home sales, which often are valued with the new construction market factored in.
The fact that real estate prices are as high as they are now in many areas has chased away investors who aren’t interested in paying top dollar for houses. That means that most home sales are made by property owners, and that makes real estate pricing more stable because typically these buyers don’t flip homes soon after purchasing.
So, instead of thinking of when the next real estate crash will occur, think of it as when the real estate market will cool from its current hot status. History shows the housing market peaks about every 18 years, followed by a dip in prices. But we’re not talking about the 2008 crash. More like a bump in the road that won’t really affect homeowners who plan to stay in their homes for longer periods.
If you’re a seller, that means you should consider listing your home as soon as possible to attract the highest price. If you’re a buyer, find a home you truly love and offer a fair price to buy it, considering your local real estate market.