The world is in a growing economic crisis. With coronavirus pandemic disrupting every aspect of our lives, are we heading towards a new housing market crash?
Many US citizens are worried that the current situation might lead to a housing market crash. Something similar happened in 2008, so why wouldn’t it now? After all, NAR reported that the number of homebuyers dropped, but many prices still remained high. Will this lead to a crash, or is the situation not as serious as it seems?
There are 10 warning signs that predict a housing market crash. The first half of them are considered critical, while others are usually following them. In order for a market crash to be nearly certain, all 10 have to be present.
1. Burst of an asset bubble
Housing market crash begins with the burst of an asset bubble. Asset bubble usually begins when the prices rise. The prices were indeed rising until February 2020, when they reached historical highs. However, when COVID-19 pandemic happened, the prices dropped in half. While the prices are still fairly high in Wisconsin, this isn’t the case in most of the states, so the asset bubble burst is still a possible scenario.
2. Rise in number of unregulated mortgage brokers
When the number of unregulated mortgage brokers rises, this is a sign that something is wrong. While there isn’t a rapid increase of unregulated brokers, in 2018 they made a 53,6% of lenders. In fact, five out of ten largest mortgage lenders aren’t even banks! Why is this a problem? Unregulated mortgage brokers are more vulnerable to damage and are likely to collapse, increasing the chances of a housing market crash 2021.
3. Rising interest rates
When interest rates rise, so does the chance of a real estate market collapsing. Luckily, the Federal Reserve lowered interest rates, so they are at historical lows in the second half of 2020. This will help not only homeowners, but real estate market as well.
4. Inverted Yield Curve
If the US Treasury Notes yield curve inverts, the housing market crash might be near. Inversion of the curve means that the interest rates for Treasurys that are short-term are higher than those for long-term yields. As of October 2020 this still hasn’t happened, but it doesn’t mean it won’t.
5. Tax code changes
When tax code changes, the impact on the real estate market is astronomical. Trump’s Tax Cuts and Jobs Act (TCJA) from 22nd December 2017 might end up having a terrible impact on the housing market all over the US. This is because, according to it, many Americans can no longer use the mortgage interest deduction. In fact, most of the real estate industry opposed Trump’s tax plan for this very reason.
6. Banks start using derivates
If banks start investing in risky financial products, a housing market could crash in 2021. This probably caused the financial crisis in 2008. How is that? The banks resold mortgages in mortgage-backed securities, which were a larger business. In other words, banks sold mortgages to anyone willing to take them, so they could support the derivates. This made it impossible to differentiate good mortgages from ba ones, leading to borrowers defaulting.
7. ‘Flipped’ homes number increases
Increase in number of flipped homes is another sign that a housing market crash 2021 might be nearby. However, during 2019 and the beginning of 2020, the number of flipped homes dropped, meaning that the house flipping isn’t as profitable anymore. This is both the good and the bad sign, as the market is no longer as profitable, but luckily a crash might not be so close as we think.
8. Decrease in number of affordable housing
When the house prices rise together with the unemployment rate, the number of affordable housing plummets. When the rents and the bills are high, more and more people are staying homeless, leading to a crash. Freddie Mac already reported that the supply of affordable units is dropping.
9. Rising sea levels
Believe it or not, the global warming has a huge impact on the real estate industry, especially in coastal regions. When the sea levels rise, many houses end flooded or their prices drop. This is never good for the local real estate market.
10. Officials issue warnings of a housing market crash
Believe it or not, a housing market crisis was predicted back in 2017 by William Poole, who warned that 36% of Fannie Mae’s loans needed mortgage insurance. If this isn’t enough – Poole was the head of the FRB of Kansas when they warned of a possible future crisis in 2005, three years before the market crash actually happened.
Are We Headed Towards a Housing Market Crash in 2021?
Sadly, there is no concrete answer behind this question. As of October 2020, there are many warning signs that have yet to come – but others are already happening.
The biggest mistake that lead to the crisis in 2008 was that the Fed ignored the warning signs of a housing market crash. In 2020, it seems like the government is taking some precaution steps in trying to prevent a new crisis. This is a good sign, and it might save us from the actual crash. While the financial crisis is certain, the chances of a real estate market crash are still unclear. Hopefully, we have learned something from the past and we’ll use this knowledge to help the real estate market.