5 Signs the Real Estate Market is About to Collapse

There is no scarcity of buyer demand in today’s home market. Low-interest rates have made getting a mortgage cheaper than ever, and despite a significant increase in housing prices, purchasers are still eager for someplace to call their own.

These put sellers in a good position, but the current hot housing market will not persist indefinitely. While we can’t foresee when things will cool off, several signals suggest real estate prices will drop. 

5 Signs that the Housing Market Will Crash

During the coronavirus pandemic, housing was an economic bright spot in an otherwise bleak economic environment. Falling mortgage rates encouraged demand, resulting in a surge in home purchases. 

The buying frenzy swiftly consumed most of the country’s available supply, prompting owners to demand ever-higher prices because of the record-breaking inventory shortage.

The magnitude of the market surge – and the data tracing it – has generated numerous analogies to the housing boom of the mid-2000s. In many aspects, this market mimics the situation in 2005 and 2006, when inflated real estate prices burst with catastrophic results.

Here are five housing-market indicators that are similar to those witnessed years ago.

Influx of Homes on the Market

While the number of houses on the market fluctuates because of many factors, you should closely watch the market if you notice many properties putting up “for sale” signs. An increase in inventory is generally a sign that the housing market is likely to fall.

In addition to increasing housing stock, the length of time unsold homes remains on the market also increases. Properties generally stay on the market for about a month. However, after a collapse, they stay for much longer.

Decrease in Prices

In 2021, home values had risen steadily month after month. However, they are sure to reach a stalemate at some point. That could be the first sign that the housing market is to implode. Nevertheless, because the market is inflated these days, prices are bound to fall some time, and this isn’t always a cause for concern. However, if they stay flat for a long time, it could signal the start of a property market catastrophe.

When the price of a house plateaus continuously year over year, it could indicate an impending property market collapse. Home appreciation and the real estate sales market are affected when home prices plateau or level out. When sellers cannot find buyers for their property, they may reduce the prices to attract more buyers.

Shifts in the Economy

Because most markets are inextricably linked to the economy, the situation of the economy can provide insight into any fluctuations in the property market. Furthermore, utilizing the stock market as a point of reference may offer insight into the economy’s direction and, as a result, the property market’s direction. A strong economy generally accompanies a stable market.

While the property market may appear unpredictably volatile, there are signals that the market is about to collapse. Keeping a close watch for any of these signs will help you avoid being caught off guard by a collapse.

Mortgage and Private Mortgage Insurance

Consumers are taking out larger mortgages than ever before to buy homes. The reason for this is partly due to the exorbitant nature of property prices. Increasing mortgage balances, on the other hand, are a sign that too many purchasers are getting in over their heads. 

As a result, those same buyers may eventually need to sell their homes all at once, resulting in an oversupply and a sharp drop in demand.

Although not every mortgage lender wants a 20% down payment at closing, it is a good idea to do so. Private mortgage insurance (PMI), an expensive premium protecting lenders if debtors fall behind on their payments, is imposed on buyers who do not put down a 20% down payment. 

When a significant number of borrowers are forced to pay PMI, it may imply that they were not financially qualified to purchase a property in the first place. It also means that when home values fall, more buyers are likely to become underwater on their mortgages, owing to their lenders more money than their properties are worth.

Lenders, Agents and Builders Declining Interest

Considering professionals who can warn you when the property market is likely to implode, you should consider real estate brokers. Agents are uniquely positioned to view situations on the ground as they arise, so their emotions and confidence in the current state of affairs can be instructive.

When it comes to builders, keep a lookout for price reductions. As the summer season approaches, builders are usually very on top of things, and they usually hike prices as the selling season approaches. If you notice them making cuts, it’s an indication that they’re concerned about the direction things are heading.

Most of us require a mortgage to purchase a home. Therefore, if lenders are not optimistic about the real estate market, it’s a warning that it may be in trouble.

By following lenders’ expectations about mortgage loan demand, mortgage refinances demand, and profit margins, you can stay updated on how lenders are reacting, what they are presently doing, and the nature of their market expectations.

A property market meltdown is not something you must be worrying about at all hours of the night. Risky lending practices drove the last housing market meltdown in 2008 when borrowers took on far more debt than they could pay, which is not the case.

Consumers are borrowing more these days since houses are more expensive; however, lenders have tightened lending criteria in the aftermath of the 2008 crisis and the Covid-19 pandemic. As a result, we are in a different situation.

With a property market that varies based on various external factors, predicting when the market will dive can be tricky. There is often an abundance of inventory in a falling market, which lowers prices but lengthens the time houses are on the market. While economic changes may take time to reflect in the property market, there are typically signs that can indicate the start of a collapse.

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.

Sign up for a free insight into the Swing Trading 101 program that I’ve developed. It’s the result of thousands of hours of trading over hundreds of thousands of dollars across stock, commodities, options, and cryptocurrencies. It’s designed to help investors take a unique but strategic approach to the markets by teaching them how to diversify and hedge their long-only stock portfolios. SIGN UP NOW FOR FREE.

Tim Thomas has investments in real estate.

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

Featured image credit: Unsplash.