Top 5 Reasons The Housing Market Won’t Crash

Real estate prices have never been higher and there are no signs that they will slow down anytime soon. While the stock market and other asset classes like precious metals have crashed, housing prices continue to defy gravity.

So many are wondering: will the housing market collapse?

While there is some evidence of homebuyers remorse over the pandemic, in March of this year, the average price of real estate for sale in the United States topped the $400,000 mark — an all-time high — according to data from Realtor.com. This is 26.5% more than in the last two years.

If homebuyers compare the current housing market to what happened in 2006, they may find a similarity when home prices were rising more and more expensive before the bubble burst.

Of course, during a bubble, rational thinking can be replaced by fear of missing out – buyers who feel compelled to buy and believe that high prices will lead to higher prices.

Soap bubble about to burst?

According to a recent Redfin poll, 77% of homeowners believe there is a bubble in their area. Is this a sign that the housing market will collapse? Not necessary.

Fifteen years ago, liberal lending standards and unbridled investor speculation fueled house prices. Today the market is completely different.

Simply put, demand outstrips supply, driving up prices and creating a bubble sensation in the market. US domestic prices have not been this high since the mid-2000s.

Then the housing market went into a tailspin with tragic consequences. The real estate bubble burst, ushering in the biggest economic depression since World War II.

With that period of distant memory and the real estate market at a new high, many are wondering if we should be correcting.

Signs of a housing market crash?

According to Phil Shoemaker of Home Point Financial, he is constantly asked: “Is this a bubble?”

The answer is that, although the rise in house prices that we are seeing resembles a bubble, you are unlikely to come to this conclusion if you delve into the fundamental principles.

As it turns out, the underlying conditions of today’s housing market are much more solid than they were 15 years ago. But not everything is so smooth.

According to Ken H. Johnson, a housing economist at Florida Atlantic University, prices are rising at a pace that could be dangerous.

Fannie Mae Chief Economist Doug Duncan acknowledged the market’s concerns about volatility, as price increases have led to financial disasters in the past.

There is a gap of 15% between what long-term factors predict and house prices, Duncan said.

There is a problem?

Price stabilization is more likely than a sharp decline, Bankrate chief financial analyst Greg McBride, CFA said.

“Although the current rate of growth in house prices is not sustainable in the long term, prices are not at risk of a major decline,” he said.

Like stocks listed on the stock market, real estate prices can rise and fall as they do now, and then remain stable for years. The most likely consequence is price equalization.

Is the real estate market on the verge of collapse? Housing economists agree that devastating collapse is not inevitable.

While Logan Mohtashami, Chief Analyst at HousingWire, says “we don’t have a bubble,” Doug Duncan believes home prices are rising at an unhealthy pace.

Despite this, he said that while the current growth is robust, the recent rise in property values ​​is not indicative of a housing bubble. According to Duncan, there is no reason to believe that the uptrend will fail.

Cool, not crash

Analysts agree that while there may be some signs of a bubble rather than a crash, the housing market is likely to cool in the coming months.

The National Association of Realtors predicts a 3 percent increase in property prices next year.

The association’s chief economist Lawrence Yun believes the housing industry will continue to perform well in 2023 and beyond, but he doesn’t expect it to outperform recent performance.

This year’s housing price-to-earnings ratio was the worst since 2006, Yoon said. He notes that “now the situation is completely different.”

There are several reasons why real estate investors need not fear a housing market crash.

5 reasons why the housing market won’t crash

1. Stocks have fallen to all-time lows

Home buyers had just 2.4 months of supply in September, according to the National Association of Realtors (NAR). In February, inventories fell to just 2.0 months of inventory.

Like any commodity like oil, homebuyers inflate their prices due to a lack of affordable products.

2. Builders Can’t Meet Demand Fast Enough

Housing construction has slowed significantly since the last recession and has never fully recovered to pre-2007 levels. Builders can no longer buy land and quickly obtain regulatory approvals to meet demand.

According to McBride, the rise in prices is primarily due to an increase in demand and a lack of supply.

3. Nearly historically low mortgage rates still in place

Mortgage rates rose slightly after hitting record lows in January, but not by much.

According to a survey of lenders conducted by Bankrate, the average rate on 30-year loans has recently been 3.22%. Low interest rates give homebuyers more market power.

By the end of 2022, the Mortgage Bankers Association predicts a rate hike of up to 4%. This will affect refinancing, but not home purchases.

The group’s chief economist Mike Fratantoni said he doesn’t think it will rise high enough to scare off borrowers.

4. Lending criteria remain strict

Loans that do not require proof of income were widespread in 2007. Lenders have made mortgages available to everyone, regardless of payment history or lump sum.

By comparison, lenders today have very strict requirements for borrowers, and most people who purchase mortgages have good or excellent credit.

The Federal Reserve Bank of New York reports that the average credit rating of mortgage borrowers reached a record high of 786 points in the third and fourth quarters.

According to McBride: “If credit criteria weaken and we return to the days of the Wild West of 2004-2006, then this is a separate issue.” Then we start worrying about an impending market crash because lax lending rules are artificially pushing prices up.”

5. Fewer people are selling

Existing residences make up the majority of the market, although the number of available units is also declining.

This is partly due to the difficulties of accessibility for the buyer. According to a survey by Discover Home Loans, 79% of homeowners would rather change their current place of residence than move.

High real estate prices may tempt some to cash out, but in reality, most people will buy another home and incur high costs associated with it.

They will run into trouble in the buyers’ market, Fairweather warns, if they try to buy again. Only those who shrink or migrate to a cheaper location can sell and buy again.

There are more open houses than ever, even though fewer houses are available due to supply restrictions. As a result, many people decide that now is the time to become homeowners.

Final Thoughts

As Fairweather points out, the demand for houses is very high. There are quite a few who are interested. Experts say this is likely because millennials are entering peak years for real estate purchases.

In their 30s, many members of this group marry into families. Fairweather notes that “millennials are making a huge effort to buy a house.” It was a long time ago.

This article originally appeared on Wealth of Geeks.