When is the Housing Market Going to Crash?

Everyone is asking when the housing market will crash, or at least see a correction in value. While many economists, housing market analysts, and talking heads have made predictions, no one is sure when we can expect the housing market to crash. Let’s explore some of the factors leading to the massive surge in value, and what might cause a correction.

The housing market has been insanely hot throughout 2020 and 2021 – and has been likened to the market before the 2008 crash. Many people expected a housing crash when the COVID-19 pandemic arrived in the United States last spring, but the exact opposite happened. Housing markets that had been nascent for years started seeing inventory selling to sight unseen buyers. Values started to increase, and available inventory plummeted. Construction is booming as developers race to get new houses to market for eager buyers. What’s going on? 

As of the beginning of April, 2021, 42% of all homes were selling for more than their list price according to Redfin, an online real estate brokerage site. 

All of this activity has both homebuyers and economists concerned – is the growth in demand sustainable? Or will there be some exogenous factor that will cause a housing market crash in 2021, much like we saw in 2008? Consumers are increasingly concerned that we may be experiencing a housing bubble, but that may not actually be the case. 

Prices have increased by a shocking 10.4% year over year nationally as of February 2021, according to CoreLogic, a market research firm. This is the largest annualized increase in housing prices since 2006 – and we all know what happened in 2008.

So, what factors are driving the massive surge housing prices?

1. Extremely low interest rates

When the COVID-19 pandemic struck, the Federal Reserve slashed interest rates in an effort to keep the economy moving. Despite the initial shock to the system as a result of many lockdowns, the strategy has worked. People are taking on new debt, including housing debt, in near record numbers. People with good credit have been able to get a 30-year mortgage rate below 3% – that’s an unbelievably and historically low number. Savvy consumers know that this means that now is likely the best time in their lives to take on debt – something that is driving a lot of the increase in demand in the housing market.

​2. Supply constraints

The first lesson of economics is the supply and demand equation. When supply is low, and demand is high, prices increase. This phenomenon is playing out before our eyes in the housing market. COVID-19 shut down many construction sites, and delayed material and labor supply which has caused a shortage of new housing inventory.

Additionally, fewer homes were listed as a result of COVID-19 as many people who would have sold chose to stay put for a year and see how the pandemic played out. In fact, there are only about half as many homes listed for sale today as there were this time a year ago, according to Realtor.com. 

With even steady demand, this would cause housing prices to increase, but demand has simultaneously accelerated, so the trend in housing prices is steeply up. This is what’s driving the fiercely intense competition in many housing markets across the US.

3. Injections of capital into the economy from stimulus bills

There have been four economic stimulus bills as of April, 2021 that have been designed to combat the negative effects of the COVID-19 pandemic. Those have injected trillions of dollars of new currency into the US economic system. While many people suffered layoffs and job challenges as a result of the pandemic, even more people were unaffected, or transitioned to working from home. 

4. Human migration

One of the results of the COVID-19 pandemic was that many people were given a rare chance to pause their daily routine. This caused them to think about where they wanted to be living, what they wanted to be doing, and other big life questions. Many of those people also were suddenly able to work from anywhere. There’s a saying – “when geography doesn’t matter, nothing but geography matters.” That means when you can work from wherever you want to, the only decision you need to make is where you want to work from. Many people decided that somewhere else was the answer, and started making changes, including buying houses.

This distribution of demand is a phenomenally interesting result of the pandemic that will certainly be studied for years to come. For many attractive small towns and mid-size cities, that meant a dramatic increase in demand for their limited housing inventory. Places like Bend, OR, Bozeman, MT, and Jackson, WY have become extremely popular. Cities like Austin, TX saw a massive influx of people from Southern California. Upstate New York saw a spike of demand from those fleeing New York City. This has played out nation wide, and it’s caused a huge amount of capital to flow to smaller cities that were largely unprepared for it.

​How much over asking should I offer on a home?

If you want to buy a house in 2021, you’ve likely asked yourself how much you should offer over asking if you want a good shot at getting the house. The answer to that can be found in the statistics from home sales over the last year.

The answer nationally seems to be about 10.6% over asking. Though, that’s a pretty worthless number unless your local real estate market precisely tracks the national average. Consult with a realtor in order to understand your local market conditions and make a competitive offer.

​What will cause a housing market crash or correction?

Now for the challenging part – when will the housing market crash? Imagine being a first time homebuyer right now (and maybe you are). It would be intimidating, expensive, and extremely challenging to buy in this housing market. The answer that many are choosing is to drop out of the market for the time being. There has been a decline in new mortgage applications in March of 2021, which could be a sign that the housing market is cooling. But what factors will really cause a housing market crash or correction?

1. Increase in interest rates

When interest rates inevitably increase, the housing market will cool. This will be a major factor in affordability for those looking to buy a house, and higher interest rates will reduce demand. This will in turn cause housing prices to flatten, though not necessarily decline. It would take a significant increase in interest rates for housing prices to actually decline from the highs we’ve seen so far – something that’s possible, though not probable. Some markets where inventory remains low and demand remains high could still see increasing home prices despite a rise in interest rates.

2. Increase in supply of houses

There’s certainly going to be a lot of people that are temped to sell their homes given the massive increase in prices. That could cause a supply increase in the market overall, which could have a large tempering effect on house prices. Then there’s all the new construction. Home builders are moving as fast as they can to construct new homes. In hot markets around the US, homebuilders have wait lists as long as two years to start any new project. That means that more people will go into the construction trade and more houses will be constructed. This will increase housing supply as well. 

Is a housing supply increase likely to cause a housing market crash? No, it’s not very likely. These homes are a response to demand increases and a huge portion of them are pre-sold, or are sold prior to the home being inhabitable. Therefore it’s not likely that these new homes will sit on the market, and therefore they won’t be discounted to sell. 

3. Mortgage defaults

One of the most interesting things about the current increase in housing prices is that while cheap debt drove a lot of the value increase before the 2008 crash, there’s a huge amount of equity in the houses being sold today. In order to be competitive in the current housing market, many buyers are making all cash offers, and essentially all are putting at least 20% down on the house and using a conventional mortgage.

FHA and USDA mortgages are considered at higher risk of falling through by sellers, so when they evaluate offers, usually only cash offers and conventional mortgages are considered. What this large amount of equity means is that homeowners have a lot of their net worth tied up in their homes, making them significantly less likely to walk away from their mortgage.

Another protection against a major housing crash is that mortgage standards were significantly increased as a result of legislation passed after the 2008 crash. This means that subprime borrowers are not likely to get access to mortgages at all, and more value is required from home buyers in the form of a down payment in order to buy a home. All of this will serve as a significant backstop against price corrections, even in the event of a national economic slowdown. 

The Bottom Line: Will the housing market crash this year?

The bottom line is that there don’t seem to be obvious risks of a major housing market crash in the market. There’s significant equity in homes, affordability remains good thanks to low interest rates, and the surge of interest in home ownership is likely to keep demand strong. 

What’s more likely than a crash is a flattening in home prices. We cannot expect to see continuous compounded housing price growth, and may in fact see a period of several years of low price growth as inflation catches up to the surge in housing prices observed over the last year. 

As with any loan, ensure you’re comfortable with the payment, and have adequate emergency