6 Painful Reasons To Fear the Financial Hit of a Housing Market Crash

The housing market seems to be on standby as home prices continue to rise–the median listing price hit a new high of $405,000 in March. Mortgage rates continue to increase, and buyers refuse to back down.

With signs indicating the housing market trend is upward, many people are questioning if we’re about to enter a housing bubble. Considering this, it is a good time to consider whether we will see a housing market crash or a slow decline in housing market prices.

A  survey of housing experts to understand what they think the housing market would look like in the next five years gave varying results. While most analysts expect homeowner demand to remain strong, there are some signals that home prices may begin to sag as inflation rises and global uncertainty grows.

Six Signs Of A Housing Market Crash

Buyers and homeowners are asking a familiar concern now that the housing market is growing again: Is the property market so hot that it’s likely to a housing market crash? So, how can you tell whether the real estate market will collapse? 

Here are six red flags that can indicate a housing market crash.

1. The Downturn In The Economy

The overall economy is one of the earliest indicators that the housing market can collapse. While property markets are very local, and a market downturn can differ from neighborhood to neighborhood, the economy is a decent overall indicator of the national condition of affairs.

The economy has an impact on housing supply and demand. More individuals will buy and sell homes if the economy is doing well – unemployment is low, and consumer confidence is high.

People have less money to spend on housing when the economy is down, or they are uncertain about their financial future when the economy is down. If a seller has difficulty finding a buyer for their home, they may lower the price to sell it.

2. Rising Interest Rates And Mortgage Rates

The fact that interest rates are rising is a strong indicator that the housing market is cooling. When interest rates are low, the property is in more demand; When people buy a house, they want to lock in a low-interest rate.

People are less likely to buy when mortgage interest rates begin to rise. Sellers will have a tough time getting a buyer for their home if demand for houses falls, leading to lower home prices.

3. Declining Consumer Confidence

The interesting thing about markets is that they often change based on how people feel about them at the moment. When consumers become hesitant about buying or selling, it’s a warning sign of a housing market crash. The National Housing Survey, conducted by Fannie Mae every month, measures people’s confidence in the housing market. The comfort factor has an impact on every aspect of the housing sector.

Demand declines when consumers are unsure about purchasing a home. People will not buy houses if they are uncertain about their financial future. People desire to buy residences if they believe they will make a good investment.

However, when people are unsure about selling their homes and prefer something new, in that case, supply decreases. Similarly, if builders anticipate a lack of demand for houses, they will build fewer homes. Real estate agents keep a close eye on the market. 

Finally, if banks are hesitant to lend money, fewer consumers will be able to obtain mortgages. All these factors have a detrimental impact on the market, and when combined, they can cause it to fall.

4. Decrease In Property Value

Homes are a valuable asset that increases in value over time. The average annual appreciation of a home is between 3.4 and 3.8%. The land is a finite resource and is a part of a house. Hence, homes are valuable.

When the housing market is hot, homes value more quickly. However, if home prices begin to plateau or fall, the housing market may be on the verge of collapsing.

5. Foreclosures Are Up

More foreclosures indicate that more people are unable to pay their mortgages. It implies there will be more houses on the market. Thus prices will decrease due to oversupply. 

If there are a lot of foreclosures in the housing market, sellers will have to reduce the cost of houses to compete with the banks trying to unload the foreclosures. Foreclosures will have an impact on the entire housing market.

6. Equity Loan Approvals

Before the 2008 housing crisis, banks encouraged homeowners to take out home equity loans. These credit lines covered the costs of new cars, college tuition, and other major life expenses. Because the economy was robust, no one was concerned about repaying them. Thus, banks took advantage of borrowers.

Unfortunately, this created a significant problem when property values fell. Moreover, families too struggled to repay their loans. Many people owed far more than their homes were worth when the market plummeted.

Banks holding purchase mortgages got first dibs on any money the borrowers possessed, followed by banks that issued home equity loans. It sparked a banking war among lenders, exacerbating the economic crisis. Hence, banks are now ensuring only well-qualified individuals are eligible for equity loans, and several banks halted equity loans in 2020 when the pandemic began.

Anyone buying a home should be aware of the warning signals of a housing market meltdown. If you don’t, you risk signing on the dotted line just when the market is about to crash! As a result, you could end up with an inflated asset and negative equity in the worst-case scenario, thus leading to financial trouble.

Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.

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Tim Thomas has investments in real estate.

This post was produced and syndicated by Tim Thomas / Timothy Thomas Limited.

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