If you live in the U.S. and are hoping to buy a house in the near future, you’re out of luck.
During the pandemic, there was a mass exodus from cities to the suburbs. People bought their first
homes with incredibly low mortgage rates. However, the good times couldn’t last, and this high demand
for houses led to a severe drop in supply. And when there is high demand and low supply,
prices go up. This is exactly what happened with the housing market in the United States. But
what goes up must come down, and now everyone is waiting for the housing market to crash.
Currently, the housing supply continues to shrink in the U.S., and costs are still rising. This
looks to be unsustainable and reminiscent of the housing bubble back in 2008. People
are doing crazy things like paying way more than a house is worth just to secure their
first home. Others forgo inspections to make their offer more appealing to sellers, which
oftentimes leaves the buyer with more than they bargained for. These new homeowners are stuck with
sagging roofs and entire floors that need to be decontaminated of mold. Overall, it’s a big mess.
As we come out of the pandemic and into what looks like a looming recession, housing prices
are still continuing to rise. This seems crazy as the housing boom has already lasted a few years,
and as the economy slows down, housing prices should theoretically decrease. People who
thought they were being smart by staying out of the market and waiting for it to crash before
buying in are horrified to find that prices likely won’t be going down any time soon.
How could the turbulent events of the past few years, ridiculously high inflation,
and a slowing economy lead to a housing market that holds its value? The natural assumption is
that it can’t, and a bubble is about to burst. However, this does not seem to be the case.
Most experts agree that we are in uncharted waters. A perfect storm of economic, political,
and societal conditions has led the U.S. housing market to act in some very strange ways. It really
did seem that the housing market was about to crash for a while, but then it stabilized and
continued to grow. Housing market experts are using terms like “abnormal” to describe current
conditions, but they warn buyers that prices likely won’t be coming down any time soon.
There are several reasons for this, and we will be going through each one. However, you have to
keep in mind a few things if you are looking to buy a house in the current market. The first is
to keep a level head. Market specialists warn that FOMO, or fear of missing out,
is one of the top reasons home buyers make bad decisions. As prices continue to rise, there is
a real fear for buyers that they might be priced out of the market. This may be true, but it’s also
incredibly risky to buy into a market that is at its peak if you don’t have a long-term plan.
Even though the prices continue to go up, they will eventually come down. And although this
might not be for a while, many buyers who FOMO into buying a house at the wrong time end up
regretting it when they can’t afford to pay off their mortgage and find themselves underwater.
Let’s examine why the housing market hasn’t crashed yet, if it will eventually crash,
and what home buyers can do to protect themselves from making bad decisions
during these uncertain times. We will start by discussing four reasons why housing market
specialists believe there hasn’t been a crash yet, and why there likely won’t be.
Reason 1 why the housing market hasn’t crashed:
Millennials and Gen Zs are eager to buy their first starter home.
Millennials love to blame Boomers for many of the problems they’re stuck with right now. To be fair,
there are certain issues in the United States, such as the failing social security system,
huge national debt, and current climate crisis, that can mostly all be linked to the Baby Boomer
generation. However, the current trends in the housing market isn’t one of them. And although
every generation has made its mistakes and hasn’t exactly left the world in a
better shape than they found it, the current high prices in the housing market are mainly
the result of people in younger generations looking to buy a house all at the same time.
Right now, Millennials and everyone younger than them make up about half
of the population in the United States. This means that there is a huge pool of first-time
homebuyers looking to get into the market and secure a house where they can start a
family and settle down. There is nothing wrong with this, but due to the pandemic,
the number of houses built over the past few years has slowed down dramatically. This is a problem
when there are a lot of people looking to buy and new inventory isn’t keeping pace with the demand.
Millennials and Gen Zers seem to all want the same thing at the same time. Obviously,
not every single person in these age groups is looking for a house right now,
but enough are that housing prices are being influenced in a drastic
way. It’s the collective desire of younger generations to buy their first home at this
moment in time that is pushing prices higher and higher. This brings us to the next point.
Reason 2 why the housing market hasn’t crashed: Low supply; high demand.
A large number of first-time homeowners looking to get into the market and extremely low inventory
due to insufficient supply built in the last ten years is one of the main factors driving
the increase in housing prices. With very high demand from Millenials and Gen Z and low inventory
due to fewer houses being constructed, price increases are inevitable. What appears to be
a housing market bubble is actually just the work of regular supply and demand.
Housing experts have been monitoring this situation closely, and most have come to the
same conclusion. Prices will not start decreasing any time soon. Even with extremely high prices,
demand has not seemed to wane very much. The imbalance between the number of houses
for sale and the number of people who want to buy them will not change until there is
a surplus of supply. Many believe it could take years for enough new
houses to be built to reach the amount of demand currently in the marketplace.
Until this happens, there is very little chance of a housing market crash. To put
things in perspective, a balanced market where supply and demand for houses are about the same
is typically indicated by a six-month buffer. What this means is that in a regular market,
inventory should last around 6 months at the prices and buying rate during that time. However,
in the current housing market, this metric indicates that there are only
1.7 months of supply, meaning that sellers are in a much better position than buyers.
Until the supply catches back up with demand and the inventory can be replenished to the point
where there are enough houses on the market to create a surplus, there will be inevitable upward
pressure placed on prices. This is why homebuyers are taking out massive mortgages on homes
that were worth a lot less a couple of years ago. At this point, you may be wondering if we will
eventually see a repeat of what happened in 2008 when the subprime bubble burst and the housing
market collapsed in the United States. The answer is probably not because of this next factor.
Reason 3 why the housing market hasn’t crashed:
people likely won’t be defaulting on their mortgages this time around.
After the mayhem caused by the subprime mortgage crisis between 2007 and 2010
that led to the housing market crash, stricter regulations were put on banks
and financial institutions lending out money. These regulations ensure that the loans given
out are low-risk and that borrowers won’t default on their loans all at once. The
housing market crashed in 2008 because banks engaged in shady loaning practices. We know
it might be shocking to hear, but financial institutions looking to make a profit often
engage in risky behavior unless regulated by a third party, such as the government.
What happened in 2008 is a perfect example of this. Banks would give out
mortgages and home loans with extremely high-interest rates to people who were
at risk of not being able to pay them back if something went wrong. Then, of course,
things went wrong, the economy slowed, and people began defaulting on their loans.
Before this happened, the banks were making huge amounts of money from the interest on high-risk
loans. However, as workers lost their jobs or just didn’t make enough to cover their monthly bills,
people started to fall behind on their payments. It was these bad practices
used by financial institutions that led to the housing market crash of 2008.
This is why the government now has stricter regulations to keep it from happening again.
For example, it’s incredibly rare to find a reputable financial institution that will give
out a loan without doing a background check on the loan holder's finances, income, and job stability.
These would all seem like no-brainer things to check when giving out a large sum of money,
but this was not always a common practice back in 2007 to 2010. Thankfully, banks seem to be
following these rules instead of returning to their old habits. There are now minimum credit
scores and down payments that homebuyers need to meet before they will be cleared for a mortgage,
which is another safeguard put in place to prevent another housing market crash.
What all of this means is that even though some houses require large mortgages,
banks are only lending to people who meet the necessary requirements to ensure they can handle
the financial burden. However, these regulations do make it harder for many people to secure loans
large enough to buy their dream homes. It’s these people who feel they are being priced out of the
market, and they’re right. A family that has been saving for years to purchase their forever
home might now find it is out of reach. And even if they are willing to take on a mortgage with
high-interest rates, banks might not be willing to give them one. This must be devastating, but it’s
also one of the reasons why there likely isn’t a housing market crash looming on the horizon.
As of the last quarter of 2021, 67% of the mortgages given out were to borrowers
with credit scores over 760, which is considered “Very Good” by FICO. People
with high credit scores are typically less likely to default on loans and, therefore,
relatively safe for financial institutions to lend money to. Knowing this, housing experts believe
that the housing market is in relatively good shape even as prices continue to increase.
That being said, there are several things that could hypothetically lead to a sudden crash,
even with all of these regulations in place. The
scary part is some of them are unfolding before our very eyes.
In the United States right now, the economy is in decline. This is due to a number of factors,
but high-interest rates to battle inflation are one of the main culprits. These protocols have
been put into place by the Federal Reserve as inflation rates have reached dangerous
levels. However, if not monitored carefully, the high-interest rates could stall the economy
and cause the U.S. to go into a recession. Many economists think the economy is already there or
will be in the very near future. The effect of a recession on the housing market is unpredictable.
If the economy slows gradually, the housing market will likely cool off as well. However,
if markets plummet and interest rates soar, the housing market will likely crash.
Unfortunately, as of right now, there is no way of telling exactly how the economic
future of the United States will play out. It seems like inflation is gradually slowing
down and could be brought under control, and even though the economy is slowing as well,
it will eventually bounce back. However, there is always the possibility something
could go terribly wrong—like a crazy dictator launching a nuke—and the U.S.
economy could go into freefall. This would cause the housing market to crash as well.
Reason 4 why the housing market hasn’t crashed:
mortgage rates are crazy right now, but that isn’t necessarily a bad thing for everyone.
As of Fall 2022, the average 30-year mortgage rate is over 7%, and all indications suggest it
will go higher. In 2020 the average mortgage rate was around 3%. This is a massive jump,
and many homeowners refinanced while interest rates were low.
This is standard practice and worked out immensely well for anyone who did
so. The downside of refinancing at such a low-interest rate is that now it would be
crazy to sell your house and take out a new mortgage at over 7% when you buy a new one.
What this means is that there is very little incentive for homeowners to sell right now. This
is keeping even more inventory off the market. In turn, people unwilling to sell because of
high mortgage rates are exacerbating the supply problem and driving prices even higher. But like
all of the other factors discussed so far, this will not lead to a housing market crash.
What has happened to the U.S. housing market is a series of unfortunate circumstances that
have led to skyrocketing prices. Yes, people are being priced out, which is painful for
anyone who is trying to buy a house right now, but since the demand is so high, people are still
buying even during these crazy conditions. The reality is that what we see in the U.S. housing
market isn’t a bubble about to burst but the natural economic process of supply and demand.
So, if there isn’t going to be a housing market crash in the future, what will happen?
Prices will likely continue to increase or stay about the same for the next few years. However,
these growth rates cannot be maintained forever, and prices will eventually have to come down.
Once there is more supply or demand goes down because prices are just too high,
housing prices will decrease. This likely won’t result in a crash but a gradual decline until
the market stabilizes. Unfortunately, during this time, there will be people who buy houses
at high prices and interest rates that will find themselves in a tough spot as they lose equity.
There is also a population of first-time homebuyers who don’t have a choice but to
buy in this market due to life circumstances. These people are buying out of necessity but
paying dearly for it. For these individuals, the initial price and mortgage rate will hurt
at first. However, if they are in it for the long haul, buyers can refinance their mortgage
when interest rates come down, even if they buy at the top of the market. As long as they hold
onto their property for long enough, it will most likely appreciate in value. But this is
only true if the owner is patient and willing to wait for the right time to sell in the future.
A byproduct of the current situation in the housing market, which isn’t talked about often,
is that it’s keeping investors out. When prices are low, housing investors will
purchase properties to either renovate and flip, or rent out. The problem right now is
that recently investors bought a lot of property, which they are either using as vacation rentals,
leasing to locals, or just leaving the property empty. This can have some nasty
consequences for certain areas, such as in the Southeastern United States or the
Mountain West. And it’s in these parts of the country you’ll find some of the highest prices.
This is because during and right after the pandemic, investors started buying up homes
while mortgage rates were low. At the same time, people with large amounts of disposable income
bought properties in these same areas to get away from their hectic lives in the Northeast
or Silicon Valley, seeking refuge in the quiet mountains and warm beaches of the south-east.
When this happened, prices in these areas began to climb. In fact, some of the most expensive
places in the country to buy a home right now are in these regions because investors
and opportunistic home buyers bought up so much inventory during the pandemic. This not
only hurts current homebuyers but it’s also affecting local residents who have lived in
these areas their entire lives. As property values go up, so does the cost of living in
these regions. And now local residents can’t afford to live in their hometowns.
This has also been happening around cities and urban centers. Suburbs and smaller towns
that were still commutable saw an influx of deep-pocketed homebuyers as corporate
employees moved away from the city life and into more rural areas. This isn’t always a bad thing,
but the fact that it happened so quickly and in large numbers is one of the main reasons
why prices increased so much over the last year in certain parts of the country. Now, people who
are trying to make similar moves on a modest budget can’t afford to buy anything in these
areas because there is practically no inventory and what is available is grossly overpriced.
The other side of this predicament is that since areas of the Mountain States and the Southeast
experienced such a high influx of buyers early on that drove prices up, these parts of the country
will be hit the hardest when the housing market starts to cool. Therefore, if you are looking
to buy a house in the Mountain West or the South Eastern United States, please beware.
We will say this again because it is very important. If you are looking to buy a house in
the Mountain States, the Southeast like Florida, or the suburbs of any major metropolitan area,
please be careful. The housing market will cool off even in the best of circumstances,
but it also might crash hard, especially in these places where housing prices have become inflated.
If you are able to wait for several years before buying a new house, this is likely your best bet,
as mortgage rates and prices will both eventually go down. If you cannot wait that long, just make
sure you have a long-term plan and won’t be severely affected when prices fluctuate.
As was mentioned before, we are in uncertain times. Everything that is going on in the housing
market and the economy has never happened at the current scale, so it’s very hard to
predict what the future will hold. That being said, prices will almost certainly continue to
rise in the United States, at least for a while, due to the still high demand and a low supply of
houses. Inevitably, prices will drop back down to reasonable levels. This could happen gradually,
or if the economy tanks and people lose their jobs, there could be a crash.
It’s impossible to tell which scenario will occur, but the best guess anyone has right
now is that we are likely headed toward a slow decline in prices over the next 2 to
5 years. Until enough new houses can be built, or investors who are hoarding houses put some
back on the market to meet the demands of new Millennial and Gen Z homebuyers,
prices will continue to rise. And since U.S. housing companies have a lot of catching up to do
on the supply side of things, it could be a long time before a decrease in housing prices happens.
Now watch “What If The US Economy CRASHES.” Or check out “$1,000,000
Will Get You A House Like This Around The World.”