How do we know the meteoric rise in US house prices cannot be sustained? Common sense and history. Common sense tells us that something will give. As more people sell their homes and stocks open up, supply may keep pace with demand, driving prices down. Or it could be that prices are reaching a tipping point and homebuyers looking to save money by snagging a low interest rate lose interest when sky-high prices eat up all possible savings.
However, if someone tells you they can predict exactly when the property market is going to collapse, double-check what they are selling. Trying to figure out when the housing landscape will flatten is a guessing game, with so many moving parts that it changes daily. But here's what we can tell you with confidence.
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The near future looks clear
Again, nothing is guaranteed on real estate, but the Federal Reserve plans to keep the base rate – the rate at which banks lend each other money – low through 2022. When the prime rate is low, consumer rates stay low. That alone should be enough to keep homebuyers interested. On top of that, the U.S. economy will grow 6.8% in 2021, according to Fannie Mae's Economic and Strategic Research Group forecast, and you continue to have a robust market for the near future.
There is also the subject of inventory. Due to a shortage of materials and labor, the builders are nowhere near the level of the building before the pandemic. As long as there is little inventory, the homes for sale are likely to continue to sell at higher than expected prices.
But where do these prices end? Real estate investors have no interest in paying top dollar for real estate that they want to generate profitably. And there are only so many homebuyers who have enough money to pay the difference between the asking price and the mortgage lender's willingness to loan. Ultimately, the pure cash buyers are being liquidated, and the people who keep looking for homes need a stabilized market to become homeowners.
In other words, there is nothing in the immediate vicinity that suggests that property prices will fall immediately. In fact, Zillow Economic Research predicts that property values will rise 10.5% from current levels by the end of 2021.
The evidence is this: history repeats itself
No matter how rosy things are for home sellers today, a quick look back at history reminds us that everything that goes up has to come down. The trick is to remember why each crash happened – and identify similarities in our current market.
Panic of 1837
The real estate market of the 19th century experienced several boom phases, followed by slumps of varying intensity. The panic of 1837 is attributed to speculative lending practices, unsustainably high land prices, and an economic downturn. That was a big crash.
After the panic of 1837 (and the relative recovery), the market has seen more dramatic ups and downs. Just as it turned out that house prices would never stop rising, something would shake the economy and house prices would fall. The stock market crisis of 1873 is a perfect example. Things were buzzing, homeowners were sure their homes would make them rich, and the bottom fell through when the stock market collapsed.
1929 Wall Street Crash and Great Depression
After a decade of skyrocketing property prices, values plummeted when the stock market crashed in 1929. Suddenly wealthy families had next to nothing. The crash also ushered in the global economic crisis, which further decimated property values. Only in 1960 did prices recover nationwide.
2008 real estate bubble
In the early 2000s, almost anyone with a pulse was getting approved for a mortgage, and house prices were rising rapidly. By 2006, their payments to home buyers who took out adjustable rate mortgages had increased some 60%. In 2007 the market slowed and then collapsed completely when hundreds of thousands of homes were foreclosed and lenders filed for bankruptcy.
And these are just a few examples of how property prices have risen to historical levels and then fell back to more realistic levels.
Experts weigh in
Most experts say the chances are slim that the US will experience a collapse on the order of the 2008 crash. There are many reasons for this, including legislative changes in lending practices.
Sometimes what we call "crashes" is really that. But more often, they mean a slowdown in the market and a setback in home prices. History shows that the real estate market peaks about every 18 years, followed by a crash (small or large). This cycle is normal and to be expected. In this case, real estate investors grab the best deals and first-time buyers have the opportunity to become a homeowner.
Five ways to protect yourself
If you are looking to get into the housing market in the near future, this is some advice to keep in mind.
1. Don't get caught up in the shopping spree
If you are paying a lot more than a home is worth, you will likely be underwater when the market pops up on its own.
2. Don't buy more than you can afford
Put simply, if you had to watch every penny to make a mortgage payment, you should be looking at less expensive real estate.
3. Make the largest down payment you can afford
The higher your down payment, the higher your home equity. (Equity is the difference between what you owe on your mortgage and the value of your home – or how much of your home you directly own). That equity is sometimes all that stands between a homeowner and a foreclosure when the going gets tough.
4. Create your emergency savings account
As a rule of thumb, set aside enough to cover expenses for three to six months in order to be prepared for emergencies. Depending on your level of comfort, you may want to shoot for a larger emergency fund.
5. Consider refinancing
If you currently own a home, decide if now is the right time to move. If you can wait, there's no reason not to take advantage of the current low interest rates by refinancing your existing mortgage.
Residential values are indicative of many things, including the economy as a whole, geopolitical activity and, as we have learned, a global pandemic. As long as you know that the value of the market can't go up forever, you can plan the day of the crash – even if that crash is more of a soft landing.
source https://seapointrealtors.com/2021/08/01/a-housing-market-crash-is-coming-heres-how-to-prepare/
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