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SHOW NOTES FOR EPISODE 618: IS A REAL ESTATE MARKET CRASH IMMINENT? 5 PROS MAKE PREDICTIONS
Aspiring home buyers and investors may have watched as mortgage rates in recent months rose along with home prices. But it all begs the question: What will ultimately happen to the housing market in 2022 and are we approaching a crash? In this episode, Bill shares his own thoughts and the opinions of 5 top experts.
Introduction
The housing market in the United States is a hot topic right now. We’ve seen videos showing lines of people waiting to get into an open house showing. My wife and I have been going through the home-buying process and lost out on homes despite offering over the asking price.
It begs the obvious question: Is this a housing bubble and if/when it will likely burst? It’s a tough question to answer because nobody knows for sure. However, you can look at the data and history of the housing market to get a sense of how things might play out in the months and years ahead.
Regulations are tighter this time around
I will admit that the housing market still feels like a bubble right now, and perhaps it is a bubble. Housing prices are going up constantly, and it’s fair to wonder how much longer most families will remain in the market for a home. But there are some reasons why a “bubble burst” may not be as violent as you think.
The housing crash that began in 2007 is widely considered the most violent in U.S. history and is a reference point for many people watching housing prices skyrocket today. The 2007 crash is still debated to this day, and while I won’t try to pull apart all of the moving pieces, there are some important differences between then and what’s happening now.
First, there were systemic problems in the lending industry that “primed the pump” for what happened in 2007. Lending regulations were much looser then, and banks approved people for mortgages who couldn’t afford the payment. These mortgages were called “subprime,” and the percentage of subprime mortgages leapt from the mid-single digits in the early 2000s to 18% to 20% between 2004 and 2006.
Ultimately, many of these borrowers couldn’t pay their bills, and the resulting spike in foreclosures began a chain reaction that crushed housing.
The government tightened regulations following the financial crisis, and it’s now much harder to get a mortgage without having the appropriate income and credit score. That isn’t to say that speculation can’t pop up again, but the Dodd-Frank Act was created to prevent these bad lending practices from recurring. The takeaway? I don’t know that the housing market will “crash” without a shock to the banking system, like in 2007, when people began rapidly defaulting on their mortgages.
Supply versus demand
Historically, real estate has proven very resilient, with median home prices declining in just eight of the past 60 years. Consider the housing crash in 2007; the peak of prices leading to a crash where there was roughly a 30% decline in prices at the market bottom.
In other words, it took years for home prices to fall, and that was arguably the most violent crash in history!
Could recession cause prices to drop? Sure. Almost every year that median home prices have declined in the past was during a recession. Mortgage rates are also rising, which makes financing homes is more expensive, and could help cool demand from buyers. At 4.7%, rates are still near multi-decade lows, but they have risen quickly so far this year.
Ultimately, you need the demand for housing to fall in order for prices to fall. A recession or rising rates can have that effect, but nobody can know for sure when, or by how much.
One of the unintended consequences of the housing crash in 2007 was that demand dropped so rapidly that home builders basically shut down. The recovery of housing starts took years following the crisis, and today it’s estimated that America is short roughly 5 million single-family homes.
Home prices will likely peak when supply and demand meet in harmony, which doesn’t seem to be the case yet. It’s hard to make that case as long as prospective buyers keep forming mobs of people trying to squeeze into an open house showing and when sellers no longer can turn away buyers offering thousands over the asking price.
We are in a recession, and mortgage rates will likely keep rising, like buckets of water trying to calm the raging fire of home prices in the U.S. Nobody knows for sure what will happen next, but 5 experts have given their 2 cents!
Five Expert Predictions
Keep in mind we are moving into prime home-buying season where families rush to purchase homes before school starts up this Fall. And activity will likely only intensify as summer nears. Add to that the mass exodus of home owners out of previously top markets such as California, New York and other blue states.
Aspiring home buyers may have watched as mortgage rates in recent months rose (though to be fair they are still near historic lows — see the lowest rates you may qualify for here), as did home prices. And that adds even more pressure to buy early! But it all begs the question: What will happen to the housing market in 2022? Here are 5 experts’ predictions of what could happen…
Prediction 1: Mortgage interest rates will rise
We’ve already seen rates rise in the early months of 2022, and some pros say that will continue. The Mortgage Bankers Association predicts that rates on average 30–year fixed rate mortgages will hit 4.5% by the end of 2022, which is up from their 4.3% projection a month prior, according to The Mortgage Reports. “Mortgage rates will have their ups and downs in 2022 and I wouldn’t be surprised if they end the year at 4.5% or higher,” says Holden Lewis, home and mortgage expert at Nerdwallet. And Dr. Lawrence Yun, chief economist at the National Association of Realtors, expects rates to hover around 4% for most of the year.
Prediction 2: Expect less intense competition
If you’re in the market for a home, take note: Some experts say this year may mean less competition. Indeed, Dr. Yun predicts less intense competition in the housing market in 2022. And Holden Lewis says: “The combination of rising interest rates and rising house prices will push some would-be buyers out of the market, which may result in reduced competition after the summer buying season is over.”
Prediction 3: Home price appreciation will slow
But just how much it will slow is up for debate (and to be fair, most pros expect a rise). Recently released research from Zillow shows that annual home value growth is expected to accelerate through spring, peaking at 21.6% in May before slowing to 17.3% in January 2023. Fannie Mae says home prices will climb 11.2% throughout this year, followed by a more modest increase in 2023. But The National Association of Realtors, which surveyed more than 20 top economic and housing experts, predicts housing prices are expected to climb 5.7% through the end of 2022
Bill Dallas, president of Finance of America Mortgage, says he believes we’ll continue to see the greatest levels of home price appreciation in rural and suburban markets where individuals can benefit from a stronger, resurgent economy. “Given some economic headwinds we see on the horizon, I believe home price appreciation will normalize in 2022 and home price growth will begin to more closely track inflation,” says Dallas.
Another thing to consider: Higher interest rates will force buyers to shop at lower price ranges so they can afford monthly payments. “Affordability problems will slow home price growth to less than 10% this year,” says Lewis. “With the Fed using its policy levers to push mortgage rates higher, look for home prices to increase more slowly as buyers are forced to shop at lower price ranges,” says Lewis.
Prediction 4: Pricier homes will be easier to get
According to Yun and data from the National Association of Realtors, homes priced at $500,000 and below are disappearing fast, while supply at higher prices has risen. “There are more listings at the upper end, homes priced above $500,000, compared to a year ago, which should lead to less hurried decisions by some buyers,” says Yun.
Prediction 5: Foreclosures will rise
With mortgage forbearance programs coming to an end, experts say the reality is that some people will be unable to make their payments, particularly if they’re out of work. “Therefore, there will be some uptick in foreclosures,” says Yun.
Millions of people got mortgage forbearances during the pandemic and those who remained in forbearance into 2022 are more likely to be suffering permanent financial hardships. “When their forbearances end, they’re less likely to be able to resume their payments and more likely to end up in foreclosure,” says Lewis.
And Yun points out that COVID devastation will also undoubtedly continue to contribute to changes in the market. “The terrible death toll from COVID will require housing adjustments, such as widow downsizing and estate sales.”
References:
https://www.fool.com/investing/2022/04/18/how-likely-is-a-real-estate-market-crash/
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