Before we dive into ways to predict a housing market crash, let’s take a closer look at what a housing market crash is. In 2007, the economy faced a housing market crash, a direct impact of the Great Recession.
Following the dotcom times, the value of real estate began to rise, thereby fuelling a rise in homeownership. Extreme low-interest rates, a lack of stringent lending standards pushed people to buy homes who would have otherwise not been able to purchase.
Home prices began to soar, reaching all sorts of new-high. Soon, mortgage-backed securities were sold off in large volumes, and mortgage defaults and foreclosures rose to record-breaking levels.
During this time, many speculative investors decided to pull out as the market was turning out to be very risky. This led to other buyers exiting the housing market.
When Interest Rates Are High, Homeownership Is Put Out Of Reach
Interest rates and the spread of credit play a crucial role in the availability of credit to build houses. Most homebuyers do not pay capital upfront, mainly because they don’t have half a million dollars to invest in the real estate. They usually finance the cost with the help of a financial institution.
Margins for net interest matter to the housing market because if financial institutions can’t lend to customers or other banks, credit availability gradually decreases, interest rates drastically increase – thereby affecting the supply of new housing loans. Today, the housing prices are 30% higher than in 2008, indicating that even more credit has been pumped into the economy. When the next crash occurs, there could be a severe decline in house prices.
Identifying housing market indicators is key to predicting housing market crashes. Indicators like building permits, housing starts, and new home sales data are released once every month, available for free download.