5 Big Reasons to Fear Housing Market Prices Will Fall

In many areas of the US, the housing bubble has shown little signs of deflating. However, one analyst believes it is unlikely to be a successful season and housing market prices have to fall.

Founder and chief economist of Pantheon Macroeconomics, Ian Shepherdson, predicts that sales may start to fall significantly and we’ll maybe see a housing market crash.

According to his research note, existing-home sales are likely to decrease by roughly 25% from their February annual rate of 6.02 million to 4.5 million by summer’s end.

Shepherdson stated that the housing market is in the early stages of a decline, which may lead to a steep fall in the trend in housing market prices.

Shepherdson pointed to mortgage demand as evidence of this slowdown.

Recent Mortgage Bankers Association data indicates a decline of more than 8% in home loan applications compared to last year.

Refinancing demand has also decreased, down nearly 50% compared to the previous year. Remember, refinancing is only part of the picture.

Also read: Proven Ways You Can Predict a Housing Market Crash

Since most buyers rely on loans to make a large purchase, a drop in mortgage demand could predict a slowdown in home sales which would trigger a fall in housing market prices.

Low affordability is probably to blame, so let’s consider these five reasons to fear a fall in housing market prices.

Reasons to Fear a Fall in Housing Market Prices

1) The Decline In Bank Lending 

As a result of low liquidity, banks cut back on lending during the 2009 recession.

Homeowners wanted low-interest-rate mortgages, but banks kept tightening lending criteria, making it harder to get a mortgage.

A healthy economy and low unemployment tend to increase home prices; Homebuyers are more confident about their jobs and are more prepared to take on mortgage debt.  

Typically, home prices rise when the economy is booming and unemployment is low.

As incomes or jobs decline, the general population might not be able to afford, or isn’t financially secure enough, to purchase homes as they could in a healthy economy. 

A declining housing market sees lower housing demand, which motivates sellers to lower their asking price to obtain a sale – also known as a homebuyer’s dream scenario!

The 2008 housing bubble is a notable example of price depreciation in the United States.

2) Fluctuating Demand And Supply

Just as with goods and services, supply and demand influence home prices. There are buyers and sellers in every housing transaction, so a fluctuating supply of homes will affect prices. 

Bid wars are common during this time. In contrast, a buyer’s market occurs when the housing market prices are weak and the supply is plentiful.

Also read: End of the Housing Bubble? 13 Great Ways to Predict the Next Housing Market Crash

Oversupply often results in declining property prices and homes sitting on the market longer than sellers would like.

We recommend looking for “for sale” signs in various neighborhoods or following mortgage news on major media channels.

3) A Less Developed Location 

A specific location’s home price may be higher or lower when the national average falls, and vice versa. Desirability plays a role. The following factors affect location factors:

  • Neighborhoods
  • Attractions
  • Hospitals
  • Highways
  • Schools

If you’re looking to buy a home in an area with a recent surge of restaurants, attractions, and good schools, home prices will be higher than those lacking these characteristics.

Other factors that affect housing prices include access to quality healthcare, crime rate, and highway proximity.

Employment changes are another important factor, especially when a Fortune 500 company opens and brings hundreds of new jobs to a community.

There is a risk of people flocking to a region and driving up the cost of housing, especially if the construction of new homes is fast enough to meet demand.

However, if businesses begin to close and infrastructure declines, people will be forced to find new employment, which will result in less demand and a decrease in prices.

Also read: Ways to Avoid the Pain of a Housing Market Crash

4) Federal Reserve is Adjusting Interest Rates

The Federal Reserve has the authority to adjust interest rates depending on current economic data at specific times throughout the year, impacting the rates that lenders set for mortgages.

An example of this was the Fed’s interest rate hike in December 2018.

Since the COVID-19 pandemic, home sales have been rising in price, and higher home prices and low mortgage rates created a seller’s market.

Now the market is leveling off, home sales are falling, but house prices and mortgage rates are surging.

According to the National Association of Realtors report in February, existing-home sales fell to their lowest level in a year.

Prices soared, and rate hikes pushed out first-time and upper-middle-class buyers. Consequently, pre-owned home sales decreased 7.2 percent during January and February compared to February 2016.

The report this month confirms that there is no slowdown.

Mortgage rates are low because homebuyers can use them to purchase homes, which is good for sellers. Rates rising can have the opposite effect. 

5) Buyers’ Expectation of Housing Prices Being Affordable

Affordability is a top concern for today’s home buyers. According to U.S. News & World Report, nearly half of buyers say affordability is their biggest concern, though most said they expect to buy within the next year.

According to Shepherdson, a shift in existing-home sales could have far-reaching effects.

Also read: Top Tips When Buying A House For The First Time

Rent increases might slow and, in some circumstances, reverses. He anticipates a similar drop in new-home sales.

In addition, fewer new-home sales would mean less demand for building materials and appliances, which would drag down GDP.

In the meantime, potential home buyers should be aware that this situation is less clear about how it will ultimately impact housing.

Final Word: Housing Market Prices Fall

A lack of inventory has fueled the demand for few homes listed for sale, which has led to a surge in home prices.

The supply of houses for sale would increase as the demand drops. Shepherdson cautions that some sellers will pull their listings or decline to market their homes because “no one wants to be the last seller when it comes to a falling market.”  

As a transactional market that uses buildings and properties, the housing industry and its economic factors rely on supply and demand. As a result of the law of supply and demand, buyers and sellers can interact.

In towns with a high demand for housing and a low supply, owners often profit from a higher sale price for their property. However, the seller may receive less than their asking price if there are a large number of properties for sale.

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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 a real estate portfolio.

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

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