Every day, I get an email from some financial newsletter telling me that the housing market could crash. But, as many of us know, headlines are less about facts and more about selling something. This led me to do some research myself to see whether or not we are truly primed for an end-of-year or 2023 real estate market correction or crash.
As a real estate investor, it’s in my best interest to know what’s going on in and around the market. If you’ve just started your real estate investing journey, or are thinking of becoming a real estate investor, this article will help guide you through why (or why not) we may see a housing market crash within the near future. I will also walk through exactly how you can tell a housing crash will happen and what you can do to put yourself in a position to profit.
Is the Housing Market Going to Crash?
First things first, what is “the housing market?” It’s important to know that there isn’t such a thing as a single “housing market.” Thousands of different housing markets exist throughout the nation, meaning a property in Boise could tank in price while one in Alabama sees just a small drop in price.
So, the answer is yes and no. In markets with high inventory and low demand, a housing crash is more than likely over the next twelve months. In stable markets with strong demographic trends, a market crash isn’t likely, but a market correction could be on the way.
Keep reading for more detail on this below!
How Does This Compare to the 2008 Crash?
When most Americans think “housing crash,” they think of 2008. The entire economy changed overnight, foreclosures hit all-time highs, and wall street was on the brink of bankruptcy.
This is NOT what we’re seeing today. Here are some quicks stats to show you what I mean:
2008 Foreclosures: 4.36%
2022 Foreclosures: 1.96%
2008 Average Homebuyer Credit Score: 717
2022 Average Homebuyer Credit Score: 754
2008 Months of Housing Inventory: 10.9 Months
2022 Months of Housing Inventory: 9.2 Months
These quick statistics show that even while the housing market is starting to stall a bit, we’re still in a FAR better position than we were in during 2008. Buyers now have higher credit scores, foreclosures are half as frequent, and there is less inventory on the market.
What Experts Are Saying About a Housing Market Crash
When you’re worried about a housing market crash, it’s best to see what experts expect to happen. So here are a few quotes from some of our favorites:
“The most likely scenario is not a housing market price crash, despite what you see on YouTube or read in headlines. The most likely scenario is this: Prices plateauing and then rising much, much more slowly than they have in recent years. How slow? Think 2-3% annual price increases rather than 20%. That would be much more in line with historical trends.”
Rick Sharga, ATTOM Data Solutions
“Personally, I don’t believe a market crash (which I define as a price decline of 20% or more) is the most likely scenario as of now. I think the more likely outcome over the coming years is a significant moderation of the housing market, with a chance that prices flatten or even go modestly negative for a period in late 2022 or 2023.”
Dave Meyer, Host of On the Market
What about mortgage rates?
“A few years of 5-7% interest rates on mortgages are going to be good for the economy, great for buyers, as demand becomes less insane, and more sustainable long-term”
Sean Grapevine, UMortgage
Signs of a Housing Market Crash
When news of a housing market crash comes out, it’s best to see whether or not the data fit the headlines. Here are a few things that could cause a housing crash, and how they’re looking today:
Too Much Inventory
Supply has to be so much greater than demand that people stop buying houses or start paying rock-bottom prices for them. But, today’s housing market isn’t experiencing high inventory. Here you can see the supply of new houses in the US, which is still far off from where we were in 2008, and now we have an even larger population of homebuyers (millennials vs. gen x).
Lenient Lending Practices
Subprime mortgages (mortgages given out to those with VERY low credit scores) were the norm back in 2007. But since then, banks have learned their lesson. In this article from Bankrate, you can see how the average mortgage borrower’s credit score has been steadily rising since 2008. This is due to so many banks completely rebuilding their lending process by only lending to the safest buyers around.
Falling Home Prices
Okay, you got us. Home prices are starting to plateau and fall. But let’s zoom out a bit and see what this REALLY means. Back in Q1 of 2022, the median US home price was $329,000. As of Q3 2022, the average home price in the US was $454,900. That’s a whopping 38% increase across the US, on average!
So, if you’re starting to see price cuts in your local neighborhood, don’t worry. Home prices would have to fall by 38% just to hit break even with where we were two years ago!
Wages and Employment NOT Keeping Pace with Housing Prices
This is unfortunately true. With home prices up 38% over the past two years, wages have not kept pace. In fact, real average hourly earnings have decreased by 3% over the year! With inflation peaking so high in 2022, employers are struggling to keep pace with wage growth. This will most likely lag over the next few years until inflation comes down and wages can catch up.
Fewer Purchases
With higher home prices and rising interest rates, fewer buyers can buy primary residences or rental properties. But this is for good reason. Someone with a $100K income was able to get a mortgage for $470,600 last year at 3% interest. Now, with 7% interest, that same borrower can only afford a home priced at $340,500. That’s a 28% drop in purchasing power, due only to interest rates!
Do I Believe the Housing Market Will Crash?
A better question to ask is: am I still buying? And my answer is a big fat yes. Regardless of home prices starting to tank while interest rates hit decade-long highs, I’m still actively looking for deals—regardless of what happens in the housing market.
I believe buying at low prices with high interest rates is a good move. So, in two to three years when interest rates get back to 4% or so, I’ll be ready to refinance my properties at the new rates, and capitalize on even MORE profit than I’m earning now!
But will the housing market crash? In my opinion, we’ll see price drops as long as the Federal Reserve keeps raising rates. But, I can’t see home prices dropping more than 15% – 20% on average. Why? There are still SO MANY millennial homebuyers in peak household-formation years. These millennials (like me!) want a place to call home where they can raise families, whether that means children or a bundle of beagles.
FAQs About a Housing Market Crash
It’s a scary time to invest, but it’s also a phenomenal time to get great deals. Don’t let fear stop you from pursuing your goals and building assets that will provide for you over your entire lifetime! If you’re still on the fence, read these housing crash FAQs:
It’s important to note that there is no single definition of a housing market crash. Some economists say that it’s when home prices fall 20% or more from their peak, while others say it’s when house prices drop 10% or more from their previous year’s median sales price. In many ways, these differences are irrelevant because the result is still the same: You lose equity value if you’re a homeowner and aren’t prepared for any kind of market correction.
A quick rule of thumb is this: buy when a deal makes sense. That means that if you’ve conservatively run your numbers, and a house or investment property still will make a profit, you should probably buy it. DO NOT try to time the market and buy right at the bottom. Buy when it makes sense for you.
The great thing about the housing market is that it’s cyclical. When things are good, they tend to correct themselves, and when things are bad, they tend to rebound. So if you’re looking at buying a house in the next few years, there’s a good chance that 2023 will be a good time for buyers to get into real estate.
