Is There a Pending Housing Crash?

Nov 27, 2018Watching the Market

Those of us that have lived through last decade’s severe housing market correction know how painful it was on the overall economy and individual net worth. We recently marked 10 years since the start of the crisis, and it’s worth considering whether the United States is poised for another housing crash.

After all, nationwide prices pulled back more than 6% in the first quarter, after a more than 31% rise since through the first quarter of 2009.

Past Conditions Were Ripe for a Crash

In hindsight, conditions were ripe for a crash a decade ago. In the years leading up to the bubble bursting, buyers bid up prices to take advantage of a sharply rising market.

Lenders were overly accommodating, freely granting loans, including to less than worthy or subprime borrowers. Certain loans were interest only, meaning none of the monthly payments went towards principal payments for a certain period of time. These were packaged and sold to investors, who played a large part in the crisis.

The slowing economy and bursting housing bubble had large ramifications for the United States in 2008, sending it into a severe recession.

How have things changed since the crash?

The last several years have seen a large run-up in housing prices. However, there are noticeable differences from the conditions seen a decade ago. One of the most prominent differences involve regulatory improvements.

In 2018, banks have new capital, liquidity requirements, and undergo stress tests. Large ones are prevented from returning cash to shareholders unless it passes muster with the Federal Reserve. Thusly, banks have become more cautious lenders, after previously being forced to foreclose on many homes.

Current Market Forecast

Recent data indicates the housing market is slowing, but not rapidly deteriorating. The National Association of Realtors (NAR) calculates an affordability index. It stood at 138.8 in July, down from 162.4 at the start of the year. Existing home sales were steady in August, after four months of declines. Unsold inventory was 4.3 months, the same as July, and up a bit from 4.1 months a year ago.

Mortgage rates are up this year, standing at 4.55% in August compared to 4.03% in January. Rates spent much of the last three years below 4%.

While the combination of higher prices and interest rates may hold some buyers back, mortgage rates are low by historical standards. In the early-1990s to the early part of this century, mortgage rates were in the 7% to 8% range.

Is another market crash pending in the US?

It does not appear a housing crash is on the near-term horizon in the United States with the economy humming along, as evidenced by solid GDP growth and low unemployment.

Providing you are financially and emotionally ready, you should proceed with your plans to purchase a home. Waiting for the next crash, which may never come, might mean missing out on quality homes you can buy at a fair price based on current market conditions.

There is a lot of talk about a pending recession in the next couple of years, perhaps triggered by increased corporate debt or trade wars. But, economic slowdowns are notoriously difficult to predict. In the meantime, you can start your homebuying process by contacting a NAEBA buyer agent in your area today!


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