The COVID-19 pandemic has caused chaos in the housing market that it might collapse. The home sales had already stumbled due to the stock market crash. Hence, this has made Americans quite worried. Is the housing market going to crash? This question is making every American worried and anxious. So, if you want to determine if the market will crash, you have to look for the warning signs. Hence, in this article, we will discuss the ten warning signs you have to look for if the market crashes. Moreover, we have also talked about what experts think about the housing market in 2021.
Will the Housing Market Crash In 2021 – The Sings
1. Asset Bubbles Burst
This is a critical warning sign. Most crashes occur due to this warning sign when an asset bubble has burst. An asset burst is when certain assets like stocks, gold, or housing dramatically rise in price in a short period. Moreover, the product’s value or asset does not support the asset bubble burst.
Hence, one sign of this potential bubble is rising housing market rates. In February 2020, the home sales had reached a pre-pandemic peak. Homes were sold at a 5.76 million annual rate a year. This changed after the national emergency was declared, and the units fell to 3.91 million in May.
The pandemic then boosted house sales. People started to move out of densely populated areas. Moreover, people who were working in homes also wanted their own spaces. The interest rates were also at 50-year lows. Hence, this also leads to an increase in demand. By October, the sales rate blossomed to 6.86 million homes.
Moreover, home prices are also a bubble. The pandemic didn’t slow home prices either. As per records, in September 2020, the price was at $226,800. The pandemic has also increased unemployment leading to people unable to pay their mortgages. Hence, this can lead to foreclosures. But, this is not going to affect the 2021 housing market, according to Hepp. According to Hepp, the foreclosures will not affect the market until 2022.
2. Increased Unregulated Mortgage Brokers
So, another warning could be an increase in unregulated mortgage brokers. As of 2019, the mortgage brokers had originated through loans 54.5%. That is more from 2018, which was 53.6%. Moreover, you have to note that just four out of ten largest mortgage lenders are banks. Also, five of the ten non-bank mortgage lenders were unregulated.
Moreover, do note that mortgage brokers do not have the same kind of government oversight as banks. So, this makes them even more vulnerable to collapse. If the housing market tends to soften again, then mortgage brokers can collapse. So, this warning sign is very crucial as well. So, you have to keep this in mind.
3. Increasing Interest Rates
This is not a new fact that rising interest rates make loans even more expensive. Hence, this slows down building homes and decreases supply simultaneously. Moreover, it also reduces lending. Therefore, this cuts back demand as well. So, if the interest rates rise quickly, then it will result in a catastrophe. But, if they are increasing slowly and steadily, then there will be no catastrophe.
In 2006, the higher interest rates resulted in the housing market collapse. So, several borrowers only had interests, i.e., only loans and mortgage rates adjustable. Unlike conventional loans, the interest rates rise along with the rise in the fed fund rates. A lot had introductory teaser rates that were reset after three years. Borrowers even found out that they could not afford the payment when the Federal Reserve raised interest rates at the same time they reset. The home prices had fallen drastically. So, the mortgage holders could neither make the payments nor sell the house. Therefore, as a result, these rose the default rates.
According to reports, the Federal Reserve rates increased drastically between 2004 and 2006. In June 2006 it was 1.0%, and in December it doubled to 2.25%. Within a year, December 2005, it increased to 4.25%. Again, six months hence, it increased to 5.25%. So, at that period, the rates doubled up too quickly. But, since 2015, the rates have increased slowly and steadily.
4. Upturned Yield Curve
Another most crucial warning sign is U.S. Treasury notes inverted or the inverted yield curve. So, this is when the short-term Treasury’s interest rates become higher than that of long-term yields. Typically short-term yields are low. This is because investors do not need a high return for investing for less than a year. When that inverts or upturns, investors that the short term is much riskier than the long term. This creates havoc in the market. Hence, this also signals a recession.
The yield curve upturned briefly in February and March 2020. On 9th March 2020, the 10-year note yield fell to 0.54%. And, the 1-month bill rose to 0.57%. But, the curve returned to normalcy afterward. Moreover, by 18th December, the 10-year note yield is 0.95%, and the 1-month yield was 0.8%.
5. Tax Code Changes
When Congress makes changes to the Tax Code, the Housing market reacts dramatically. Earlier, many people thought that the TCJA or Tax Cuts and Job Acts hurt the housing impact. But, this is not the case, as it seems.
So, the plan increased the standard deduction. Hence, not many Americans itemized. Therefore, the Americans could not take advantage of the mortgage interest deduction. So, the housing market is opposed to TCJA.
So, since then, tax changes hardly have any effect on the housing market. Moreover, home purchases were reduced by middle-income families. These families took the standard deduction. But, this was offset by the other income groups. The law had doubled the standard deduction. Therefore, now low-income families could afford a home then. On the other hand, higher-income families used itemized deductions. Moreover, further tax cuts also allowed for buying new homes.
6. Banks Return to Use of Derivatives
The housing market can collapse if hedge funds and banks begin to invest in riskier financial products as they did back in 2007. So, these derivatives were one of the major causes of the financial crisis. Banks had sliced up the mortgages and resold them in MBS or Mortgage-backed Securities.
So, over time the MBS became a more significant business than that of mortgages. Therefore, the bank sold out mortgages to anyone. They needed it to support the derivatives. Also, they sliced them up to hide the bad mortgages in bundles with useful mortgages. Hence, when the borrowers defaulted, all the derivatives were considered to be bad. So, this sign caused the expiry of Lehman Brothers and Bear Stearns.
7. Inflation in ‘Flipped’ Homes
Flipped homes are bought by people or real estate owners and then renovated and sold in less than a year. In the 2008 recession, home flipping had played a significant role. So, speculators purchased homes, made improvements, and then sold them as prices kept on rising. As in 2006, flips included home sales 11.4%.
Flipping has come down considerably. In the third quarter of the previous year, 5.1% of home sales were purchased for quick resales. That is low from the second quarter of 2020 that stood at 6.7%. Moreover, it is much lower than in the first quarter of 2019, 7.2%.
So, the flipping decline is because housing stock decreased inventory. Simultaneously, if you see, flipping has become profitable as well. As per Attom Data Solutions, the COVID-19 pandemic effect on flipping homes is unpredictable and contradictory. They are unable to forecast. Therefore, you must also look for this warning if you wonder if the housing market will crash?
8. Economical Housing Plummets
When the housing market is booming, it also increases home prices. So, another sign of a real estate bubble is the availability of economic housing shrinks. Moreover, real estate growth outstrips your income growth.
So, there are signs that this is happening. As of 2017, only 39.1% of rental units across the U.S. were economical for low-income households. That is, however, lower than 55.7% in 2010. This shortage has impacted badly in cities, and this has soared up the home prices.
Note: In the year 2019, the single-family home’s median sale price rose faster than that of the median household income. This is for eight years straight.
So, you must keep this warning in your mind.
9. Increasing Sea Levels
The regional housing market can collapse due to the effects of rising sea levels. By the year 2045, 300,000 coastal properties will be washed away in flood 26 times a year. Hence, the housing market can collapse in areas vulnerable to increasing sea levels.
The value of the housing market is $136 billion. This affects the utility or value of thirty-year mortgages. So, as of 2100, about 2.5 million homes worth value $1.07 trillion will be at chronic flooding risk. Moreover, the properties on the coast are at higher risks.
In Florida, Miami, the ocean completely floods the streets during high tides. Individual Harvard researchers have found out that home prices rise in Miami Beach and Dade County’s low-lying Miami areas. The prices are rising than the rest of Florida. Properties at risk of rising sea levels are sold at a 7% discount to other comparable properties.
Now, most of the properties in these cities are funded by home mortgages or municipal bonds. Hence, the destruction will injure the investors and will also depress the bond market. Moreover, markets can collapse after severe storms. Therefore, properties near the coastal areas are at higher risks of collapsing the market. Hence, one should be very careful of this warning.
10. Officials Warn of Real Estate Crisis
Now, do note that official warnings of a real estate or housing crisis are the least critical indicators. So, officials can predict it wrong as well. For example, the former President of the St. Louis Federal Reserve Bank, William Poole, in the March 2017 op-ed warned of a subprime crisis. So, the President made the remarks that 36% of Fannie Mae’s loans needed mortgage insurance. But, on the other hand, Poole was rightfully warned of the 2005 subprime crisis.
Therefore, you have to pay attention to the officials’ warning when you see all the other warning signs are flashing red. It is not always required that you have to be scared of an official’s warning, as seen in Poole’s cases. Make sure you check out all the other warnings before worrying over the official’s warnings. When you find all the other warnings are red as well, go by the official’s warnings.
What should we learn from the Real Estate Market crash in 2008?
The housing market crash in 2008 was caused by specific forces that are not currently present anymore. First of all, the insurance companies had created default swaps protecting the investors from losses. Losses in derivatives like mortgage-backed securities.
Therefore, to meet the demand for mortgages, banks gave out loans to about everyone and anyone. Banks did not even worry about the subprime mortgage borrower’s credit-worthiness. Moreover, banks, on the secondary market, sold the mortgages. So, this created more significant risks in the housing market.
In 2005, the homebuilders were engaged with demand. So, when the supply outpaced the demand, housing prices began to fall. New home prices considerably fell by 22%. That did burst the bubble.
The Federal Reserve Banks ignored these warnings. The Feds must have set a prudent mortgage lending standard. Instead of that, it lowered interest rates. So, they underestimated the mortgage crisis. A lot of subprime purchasers were pension funds, individual investors, and retirement funds.
Moreover, they invested more in hedge funds. Hence, spreading the risks throughout the country. So, this is what we have to learn from the 2008 housing market crash. We must not ignore the warning signs.
What Do the Experts Predict of the 2021 Housing Market?
Below we have listed some experts’ opinions on the real estate market 2021. So, let’s check out the opinions.
1. Chief-economist, realtor.com, Danielle Hale: He says that sales may increase up to 7%. And, simultaneously, prices can rise another 5.7% to that of surged prices in 2020. The mortgage rates may grow gradually, but the demand for properties, the recovering economy, and the low mortgage rates will lead to cost and sales growth.
The lagging supply and buyer’s demand will keep the prices growing. This will happen at a much slower rate as buyers contend with mortgage rates and price rises that create affordability challenges.
According to Danielle Hale, the Gen-Z or the Millennial buyers will play a more significant role in the housing market. The rapidly increasing prices will create a rift to entry for the first-time buyers in these generations. This is because they do not have home equity for tapping down for payment savings. While the supply is expected to lag, Danielle does expect it to slow. Moreover, it is also expected to stop as sellers grow even more comfortable with the market pickups. The sellers will again grow more comfortable with the construction picks. Single-family housing is expected to rise by 9%. So, in short, the market will stay seller-friendly with low mortgage rates and improving home selections for sale.
2. Chief Economist and Senior Vice President, National Association for Home Builders, Robert Dietz: As per Robert Dietz, the home builder’s confidence is at a record high. Hence, you will find continued gains in single-family construction. Now, there might be some slowing down of new home sales. This is because the growing sales share has come from the homes and property that haven’t started construction yet. Nonetheless, the buyers’ traffic will remain strong throughout. Thanks to the favourable demographics, a shift in real estate demand’s geography demands lower interest rates and lower-density markets.
The headwinds on the supply-side will persist. Residential construction will face limiting factors that include longer building materials delivery times, higher costs, labour skills shortage, and regulatory cost burdens. Moreover, for apartment construction, multifamily rental development will show weaknesses, more particularly in high-density markets. But, the remodelling demand will remain sturdy and expand further.
3. Deputy Chief Economist, CoreLogic, Selma Hepp: 2021 can hold a fair amount of surprises for us, according to Selma Hepp. The expectations for real estate markets are positive anyway. Firstly, the interest rates that have already motivated a fair number of buyers in 2020 will remain low. Therefore, this will help in improving the affordability concerns that resulted from the price appreciation in 2020. In simpler words, the low mortgage rates will provide for greater and higher purchasing power. This is mainly for newbie buyers.
Secondly, the newbie buyers will act as a more potent force in the market as Millennials turn 30. This stage is a critical and major household formation period. Moreover, the oldest Millennials are also simultaneously contributing to the trade-up market. So, this will lead to substantial home sales activity.
Next, inventory levels will show some improvement. These will be partially from sideline sellers, distressed homeowners, and more new constructions. But, the most important point is that the real estate market will keep on struggling. This is due to demand and supply imbalance. Hence, leading to sustained competition among home price appreciation and buyers, but at a slower pace than 2020.
4. President, Asian American Real Estate Association of America, Amy Kong: The Asian American has seen the biggest income growth in the past decade. This is bigger than any other racial or ethnic group in the United States of America. This is about 8% compared to that of the national average of 2.3%. Education has undoubtedly played a major role in this as 54% of Asian Americans have a bachelor’s degree compared to the 32% national average. Hence, with these low-interest rates and income growths, the Asian American community has seen a continued rise in homeownership rates within its community. This is across the non-traditional markets, more particularly in the Southeast and Southwest regions of the country. States like Alabama, North Carolina, and Texas has seen a net migration of this community.
So, this is good news overall, but not to forget the income disparities within the community. While many Asian Americans have experienced an increase in income, the pandemic has also closed down the community and local shops. Hence, this can have an impact on a specific section of the Asian American community. Local shop closings can lead to low-income growths in quite a few families.
5. Co-founder, Landed, Jesse Vaughan: Essential individuals and professionals who can efficiently work from home are buying homes. The pandemic has shown that we can work from our homes, easily yielding high results. Hence, a lot of people have grown comfortable with their home environment or are buying homes. Moreover, people are also changing their housing preferences, like; they are looking for more space. More space allows people to work even more openly. So, the housing market will remain strong due to forbearance programs and low mortgage rates. But, there is still a significant risk. This will happen when economic normalization, i.e., coming out of the pandemic, is delayed or botched.
Millennials and others will keep moving to cities or suburbs as it was before the COVID-19 pandemic. The pandemic has considerably accelerated generational trends like getting married, desiring more space, and having children. Jesse Vaughan is expecting a price surge in metropolitan cities like New York and San Francisco. Simultaneously, there might be trail rising in mid-sized cities like Salt Lake City, Texas, and Austin.
So, the pandemic is making people opt for newer trends and looking for more space. Therefore, leading to buying new homes and building the housing market.
6. Chief Economist, Redfin, Daryl Fairweather: While the U.S. will vaccinate most of the citizens by the end of 2021, many countries will not be able to. Under-developed or developing countries like India, Pakistan, Niger, and South Sudan will still struggle with the COVID-19 pandemic and vaccination. Hence, the economic recovery globally will take considerable time. Thus, this will make the U.S. mortgage-backed securities even more attractive to international investors. Therefore, keeping mortgage rates relatively low. Moreover, even the COVID-19 pandemic is hopefully nearing its end, Americans will continue to buy new homes for adjusting to their newer lifestyles. The annual growth sale is likely to surge from 5% to 10% in 2021.
Increasing prices for current homes will drive buyers to a new one. Moreover, home buyers are looking for homes in the rural and suburban areas where the property is cheaper. Hence, there will be more areas where new homes can be profitably built. By the end of 2021, Chief Economist, Daryl Fairweather expects the homeownership rate to rise above 69%. This will be for the first time since 2005. Hence, we are expecting a good housing market in 2021.
7. Chief Economist, LendingTree, Tendayi Kapfidze: The real estate market will surely be a bright spot in the year 2021. As Feds will keep up its security purchases, the mortgage rates will remain low. One of the less appreciated rollovers is the 2020 savings, which will let wealthier families buy new homes. Moreover, the additional fiscal stimulus can also find a way to the real estate market.
Also, Biden’s administrative policies may extend access to the housing market through down payment. Lastly, the student’s loan forgiveness can also lead to many students and people buying homes and saving for down payments.
Now, there are certain downside risks as well. The economy will recover sooner or later as vaccines will lead us to the path of normalcy. But, the labour market can remain weak. An unenthusiastic labour market will be accompanied by unenthusiastic income growth. Moreover, job losses are also moving up the income scale. Therefore, transitioning to permanent losses than temporary. Again, the lending standards will tighten as well. This will be due to the end of foreclosure and forbearance moratoriums perform like a wild card. Hence, potentially influencing home prices in some areas. Another wild card is the rent crisis. It could create chaos in the owner-occupied market by affecting the financial markets or adding supply.
Therefore, these were some of the experts’ opinions on the 2021 housing market. You can go through them and decide on your course of action. But, do not just rely on experts’ opinions and consider other red flags listed above.
The housing market or the real estate market is not going to collapse. But, not to forget, distressed by many conflicting forces. On the optimistic side, the Feds will keep the mortgage rates low. Hence, spurring home purchases. Moreover, as people are looking for more spaces, they will surely buy property or home. Therefore, in short, the housing market is not collapsing any time sooner. You can always check by following the warning signs and experts’ predictions. I hope that we have successfully answered your query on is the housing market going to crash? Therefore, do not wait any more, and buy a new property now.