August 2021

Will The Housing Market Crash?

Will The Housing Market Crash?

There is no question the real estate market is the Wild West right now. It’s so crazy that 47% of homes listed in April went pending in under a week. A house in Maryland went for $1 million over the asking price, and another buyer said she would name her first-born child after the seller (and still didn’t get the house!). With so much pandemonium, it’s leaving many people wondering if the booming housing market will burst and crash as we saw in 2008. Plus, potential home buyers are asking themselves, “Should I buy a home in this hot market or wait it out?” While there is no crystal ball to predict the future with 100% certainty (who could have seen a pandemic coming?), there are some strong indicators of what will happen to help you make a decision.

Low Interest Rates and Supply Will Continue 

The reason we are even in this booming real estate market is due to a few key factors. Interest rates hit historic lows, there was a mass exodus from major cities, and supply is at a record low. It basically created the perfect storm for a seller’s market. And those factors aren’t going to change drastically in the next couple of years. Yes, there are indications the demand is reducing–home mortgage applications fell 3% from the week before and were 2% lower than the same week a year ago, according to the Mortgage Bankers Association. But that only means we could see a cooling of the housing market, not a crash. 

Plus, supply isn’t likely to spike suddenly. The pandemic halted new construction, and the soaring lumber prices also encouraged builders to put new projects on hold. There’s also evidence seniors aren’t downsizing as much and are instead “aging in place.” Again, this leads to limited inventory. And until that inventory increases to the point that there’s more supply than demand, nothing will change drastically. All the experts expect instead of a 10% or 11% yearly growth, it will be 4% growth for 2022. The growth rate might slow, but it will likely continue to be an overall growing market for the next few years. 

Borrowing Restrictions Will Likely Prevent A Real Estate Crash

Why isn’t a housing bubble burst likely? Well, the market is in a very different place than the one that burst in 2008. The mortgage industry is operating in a completely different way regarding the overall risk factor involved in underwriting and approving, and funding loans. Before 2008, you could have 0% down, 100% financing, no credit check, no income check, and no asset check. That left many people unable to afford their homes in a few years, and massive foreclosures followed. Those high-risk loans aren’t a significant percentage of the overall portfolios that banks are holdings. So, for a crash to happen now the way that it did in 2008, we don’t see that happening. 

With that said, it means potential homebuyers can expect more stringent borrowing restrictions. Lenders were very nervous when the pandemic first hit and put a lot of restrictions in place. But, many of those are starting to subside. What you are likely to face is a requirement of higher credit scores, proof of employment, and some additional overlays. This reduces the risk for lenders and helps ensure you are actually purchasing a home you can afford. So, there might be a little more legwork and effort involved, but you won’t have to worry about affording the house in the future. 

Should I Buy A Home Or Wait In This Housing Market?

This is the million-dollar question, right? The short answer is “yes” if you can afford it. The reason is that even with home values at record highs, the record low interest rates offset that cost. Let’s say you could buy a home for $300,000 a year or two ago. Now, you can buy a $400,000 home for the same monthly payment today. And if you still wanted to buy a home for $300,000 now, that means you could save tens of thousands of dollars over the life of the loan. You could be paying up to 30% less in interest with a 30-year mortgage. Plus, if you look at the monthly savings, it’s hundreds of dollars each month. A $2,500 a month mortgage becomes $2,000. So, that’s $500 a month in savings, in other debt payments, or a new car.

It makes sense to wait to buy a home in this market if you aren’t planning to stay long-term. This is not a good time for a 2 to 5-year starter home because you may not recoup that equity in a few years. Just because values will go up next year doesn’t mean values will keep going up the following year. In 10 or 15 years, they’re likely to go up, but it could be a risk in the short term. Even with low interest rates, you have to factor in what’s left to pay on the mortgage if the value declines in addition to closing costs. This would make buying now the more costly choice, and it makes sense to wait a bit. But, if you’re planning to stay in the home longer, it’s still a great time to buy. 

Pro tip: Get A Rate’s “Buy Vs. Rent” calculator can help you determine what’s the best option if you’re on the edge. It considers everything, from the number of years you plan to stay in the house to closing costs and taxes. Input the numbers and find out instantly if you should buy a home or wait in this housing market. 

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