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Why There Is No Real Estate Market Crash on the Horizon

by Busines Newswire
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Millions of people study the real estate market regularly, looking for any sign that it’s a good time to buy or will be a good time to buy in the near future. For some people, this would be an opportunity to add to their portfolio and secure new rental properties for the sake of generating passive income. For others, this would be an opportunity to purchase a house for the first time.

Many people are secretly hoping (or not-so-secretly hoping) that there will be a real estate market crash on the horizon, taking absurdly high prices and tanking them into the ground. Such a development would be financially devastating to millions of homeowners, but would open the door to new buyers who are simply interested in becoming homeowners for the first time.

Unfortunately for them, this doesn’t seem likely. Let’s explore why this is the case.

The Hope for a Real Estate Market Crash

On some level, it’s reasonable to understand the desire for a real estate market crash. If housing prices were suddenly cut in half, millions of people who cannot currently afford a home would be able to buy one. They could then benefit from appreciating property values, build equity, and get out of the rental market.

But there are a few problems with this. First, as any real estate expert can tell you, there are good real estate deals to be found in almost any market. You don’t need to wait for a crash to find an excellent purchasing opportunity, even when prices are seemingly insanely high.

Second, the economic impact that a real estate market crash has is much more significant than people realize. Prices crashing might be beneficial to you, but if you lose your job as a result of the economic devastation, you still wouldn’t be able to afford one.

Third, and perhaps most importantly, it’s not realistic to hope for a real estate market crash at this time.

Why Real Estate Market Crashes Happen

Real estate market crashes happen because of one or more of the following, at least in most cases:

  •       Grossly overinflated prices. Sometimes, real estate markets crash because of grossly over inflated prices. Houses are selling for far more than is reasonable, often for a variety of reasons. Once realistic economic decisions re-enter the market, prices naturally come down to a rational level.
  •       Very low demand, very high supply, or both. A crash can also happen because of a sudden surge in supply, a sudden drop in demand, or both. If there are suddenly a million new houses for sale, competition increases and bids start to decline. The same is true for a situation in which there are suddenly far fewer buyers making bids.
  •       Poor economic conditions. Generally poor economic conditions can also lead to a real estate market crash. If millions of people lose their jobs and suffer from major declines in their savings, they may no longer be able to afford to make competitive bids.
  •       Exceptional circumstances. Exceptional circumstances can also lead to a crash. The most infamous example is the 2007-8 housing market crash in the United States, when bad lending practices and unethical practices by financial institutions created a kind of domino effect in which the housing market eventually collapsed.

Why a Real Estate Market Crash Is Unlikely

So why is a real estate market crash unlikely now?

  •       Sound lending practices. Financial institutions cleaned up their game and presumably learned a lesson from the 2008 financial crisis. Debt held by Americans is still very high, but mortgages are generally being provided via sound lending practices.
  •       General market health. Overall, the economy is doing well. Unemployment is low, the stock market is high, savings are up, and people are spending their extra money. There are no signs of a recession on the horizon.
  •       Low mortgage interest rates in the recent past. In the wake of COVID-19, the Federal Reserve slashed interest rates, giving millions of homebuyers and investors the opportunity to secure properties at insanely low interest rates. People holding those properties are very reluctant to sell, stifling available supply.
  •       Reasonable mortgage interest rates now. It doesn’t help that current mortgage rates are still somewhat reasonable; this keeps demand relatively high, putting upward pressure on purchase prices. The Federal Reserve has indicated interest in lowering rates further in the near future, which could make the demand issue even worse.
  •       Limited new supply. Complicating matters, there are limited sources of new housing supply. Laws and regulations prevent builders from accessing many areas and artificially increase the cost of building.
  •       General population growth. The rate at which the U.S. population is growing has declined a bit in recent years, but the population itself is still ticking upward. As more people are born into the country and as more people enter the country, demand naturally increases.

Real estate market crashes are somewhat unpredictable, so it would be unreasonable to say that one is impossible in the near-term future. However, given what we know about crashes and given what we know about the current economic environment, a crash seems unlikely. If you’re desperate to acquire a home for a lower price, you’re better off searching for a home in a cheaper area or aggressively searching for a better deal, rather than waiting for a crash to happen.