The housing market is hot, and it has been for over a year now. The average housing price is up, and the supply of homes to choose from is consistently down. If you’ve been wondering, “how long can this last?” you’re not alone. There is increasing concern among the public that a housing market crash must be coming. Let’s take a closer look at market conditions, and what factors make a housing crash likely.
The Housing Market During COVID-19
The housing market took a turn when COVID-19 stay at home orders were issued. Without being able to see homes in person, many people chose to wait to buy or sell a home. As many office jobs became remote jobs, Americans across the country had a chance to reevaluate their priorities. As a result, families sought more space in the suburbs, and young professionals relocated to what were previously just their vacation destinations. Others chose to invest in second home’s during stay-at-home orders. Ultimately, the housing landscape changed drastically.
As many sought new homes, the inventory available to choose from decreased quickly, and prices increased just as fast. This real estate market has seen the biggest price increases since the Great Recession. However, it’s important to note that the recent price increases are caused by factors much different from the 2008 housing bubble burst.
Market Conditions in a Housing Market Crash
Supply and Demand
The current lack of inventory is largely to blame for the increase in housing prices. As the pandemic kept sellers from allowing prospective buyers into their homes, fewer homes were put on the market. In addition to this, fewer new construction homes are available due to delays in shipping and securing construction supplies.
This is a major difference between today’s booming market, and the Great Recession’s crash due to loose lending practices.
Low Interest Rates
Increased demand for houses is also related to all time low interest rates issued by the Federal Reserve. In recent months interest rates are beginning to rebound, but remain historically low. This means even as buyers are facing increased home prices, they are often willing to pay a premium because they’re locking in a great interest rate.
While the Great Recession had it’s low interest rates, they were combined with loose lending practices that resulted in a crash. The current market varies from this as borrowers are required to undergo in depth income checks, and the Consumer Financial Protection Bureau enforces these new regulations.
A Housing Market Crash is Unlikely
Now for the million dollar question, is the housing market going to crash? Typically, a housing market crash occurs when there is a breakdown within the system. For example, the Great Recession’s loose lending practices and lack of loan regulation. However, the current housing market has no key indicators that a crash is coming because demand is predicted to stay very strong for homes.
We likely won’t see a housing market crash in 2021 for a variety of reasons. A housing bubble happens when house prices rise higher than what can be explained by the basics, such as mortgage rates, income growth or population increases. While the current all time low interest rates may be alarming to some, this drop has served as a slight offset to the rise in home prices according to the Fed.
Housing Market Crash: Things to Consider
Higher Lending Standards Help prevent a Housing Market Crash
Pandemic Mortgage Forbearance programs have given homeowners the ability to postpone their monthly mortgage payments while also avoiding penalties. At the end of 2020, overall mortgage delinquencies declined 5.8% due to these forbearance programs.
In March of 2021, over 2 million homeowners were a part of these forbearance plans. With time, the economy is slowly recovering from the pandemic. As a result, many homeowners are again employed and have resumed their mortgage payments.
It’s important to note that while these forbearance programs have helped many homeowners, others will be unable to resume payments when the forbearance ends and lose their homes as a result.
Another key difference in today’s housing market versus the housing market crash of 2008 is the amount of equity homeowners have. Equity is the difference between a home’s current market value and the mortgage balance due. For many, equity is a reason to stay in their current home longer. This is because home values inevitably increase over time, thus increasing the owner’s equity.
This is important to note in today’s housing market because homeowners have seen large increases in their homes’ value. This cushions homeowners against defaulting on their mortgage if home values fall. The United States has had nearly a decade of economic growth, allowing for the increase in owner equity. Today, the average homeowner has over $200,000 of equity in their home.
Price Growth Will Slow, But Not Stop
For the foreseeable future, home sales are projected to remain near current levels and inventory is expected to increase as more of the public is vaccinated against COVID-19. Low mortgage rates continue to keep purchasing power strong. But, as these rates steady and home prices continue to increase over time, monthly mortgage rates will also increase.
The housing market will remain competitive as new builds are still in short supply, and more millennials reach prime home buying age and start families. Bidding wars for buyers aren’t going anywhere for the time being, but you may be competing with fewer offers as time goes on. With that, as construction slowly catches up with demand, home prices will likely no longer see double-digit price gains. Additionally, the vaccine roll out may be predicted to ease seller apprehension. This should improvise inventory supply in the coming months.
What Does This Mean?
We know that a housing market crash is unlikely in 2021, so what does this mean for buyers? For starters, low interest rates are here to stay for the time being. The economy is also picking back up post pandemic providing prospective buyers the income to save for a home. However, supply is still low in most markets which will keep prices high overall. Consider your loan options when saving for a down payment and determine a budget that is right for you.
Homebuyers with the ability to wait to purchase, or to explore listings that have been active on the market for a longer period will ultimately get more house for their money. If this isn’t an option for you, consider your location options and budget carefully. Some neighborhoods are more cost effective than others, enlist the help of an expert agent to ensure you’re able to act quickly when new listings go active.
Buying with Trelora gives you a distinct advantage because we split our buyers’ agent commission with you, giving you cash back up to $6,000 to use as you wish. You can use that cash to furnish your new house or cover closing costs. Plus we have top-rated agents that provide exceptional service, whether you need to search for the right house in any type of market, consider an offer, run comps, and close the deal. Often, you can afford more home than you think with Trelora.
You’ve probably heard this plenty of times in this market, but now is a great time to sell your home. There has been a recent influx of sellers, but demand from buyers still outnumbers available listings. This means bidding wars will continue, but there may be fewer buyers competing against each other for your home. An increase in new construction homes would also help balance the market by increasing supply.
It’s more important than ever to list your home at the right price. Some sellers aware of the hot market conditions may be tempted to list their home high since buyer competition is steep. But this could result in your listing sitting on the market with no bids, ultimately resulting in lower offers from buyers concerned there is something wrong with the home.
If you aren’t sure whether it’s a good time to buy or sell, Trelora Real Estate agents are happy to help. Sign up for our mailing list to get monthly updates on the state of your market, including inventory levels, and median home prices.
Christopher has been been in the Real Estate industry for 8 years and has had the opportunity to close over 1,000 deals while acting as the Managing Broker for thousands more. Christopher is passionate about continuing to find ways to simplify, maximize, and serve Trelora’s clients exceptionally well and spends his time building teams to deliver high levels of service. When not doing real estate Christopher can be seen training for marathons and ultra relays with his 2 year old daughter, eating pizza, and drinking a steady stream of Diet Coke.