The blame for the 2008 recession goes to the real estate market abuses. Let’s check if a real estate crash is an immediate possibility now.
One remembers what happened in 2008. The entire US economy experienced a steep fall due to the collapse of the residential real estate market. In the post-pandemic situation, people are doing remote work from their homes. It has caused a surge in real estate, especially the residential real estate market. Housing investment is the most important among all investments one makes in life, you can read more about 10 Reasons For Investing In Real Estate.
With the current surge in real estate prices coupled with a slump in new home construction, most people started thinking if the country is again heading towards a real estate crash. As a strong real estate market is vital for the US economy, let’s start digging.
What is a real estate bubble?
A real estate bubble is also called a property bubble or a housing bubble. It is a periodic phenomenon in the local or global real estate markets. It happens when the asset prices go up when people view the future as implausible or inconsistent. It starts with a continuous increase in demand when the supply is limited.
Speculators entered the market at this stage. They pour in more money driving the demands further up. Consequently, the property prices shoot up very high rapidly and then decline causing a real estate crash. Real estate bubbles are much more critical than the stock market bubbles and have a lasting effect on the economy.
Is the Real Estate Market Going to Crash?
Thanks to the COVID-19 pandemic! It has kept the real estate, especially the residential real estate market hot for 2020. It is because of the forced quarantine and the culture of working from anywhere. The real estate market turned extremely competitive. The prices of the houses have gone so high that it could be indicative of a bubble.
A majority of Americans are worried about the real estate crash and the impact of the pandemic on the residential real estate market. The earlier crash of the stock market worsened the fears. And people who have seen the 2008 financial crisis are also spooked fearing another crash. But the sales suddenly hit new heights.
According to CNBC, around 42% of homes were sold for more than their list price. It is the combined effect of shortage of supply for sale and low mortgage rates. Moreover, because of the strict mortgage formalities, the homes became affordable now. While the realtors are gradually increasing production, the economy is also opening up slowly. So, the situation is likely to cool down.
The real estate market outlook in 2021
The real estate market, especially the housing market is on fire this year. This is because of the low mortgage rate and the surge in remote work caused by the COVID-19 pandemic. Moreover, there are not enough homes to meet the growing demands. The Federal Government has taken measures. It has kept the interest rate low. More and more people are getting vaccines. It is leading the country to the path of normalcy. Can it result in a real estate crash?
As the job market has started recovering from the effect of the pandemic, people are gradually getting more jobs. Thus, the confidence of the consumers is also on the rise. The US GDP growth is also estimated to be 4.2% in 2021. As the market sentiment goes, real estate activities will stay strong in 2021. According to Fannie Mae, the improvement in the job market will also limit distressed sales in 2021.
10 Real Estate Crash signs to look at
Checking the warning signs can help you know the possibility of a real estate crash.
Property bubbles burst
The first sign of a potential property bubble that can result in a real estate crash is rapid home sales. The COVID-19 pandemic has added to this. Families are now shifting to less populated areas. Lowering of interest is also contributing to this.
A rise in unregulated mortgage brokers
An increase in the number of unregulated mortgage brokers is another sign of a real estate crash. They do not apply their oversight like banks and make risky investments. As such, they are vulnerable to collapse.
Higher interest makes loans expensive, results in slow lending and cutting on demands. The Federal government has decided to keep the interest rates at a level until 2023. It is a great move for avoiding catastrophe.
Yield curve inversion
The inverted Treasury yield curve is another sign of slumps in the real estate market. It happens when short-term yields are higher than long-term yields. It plays havoc signals a crash and recession.
Tax code changes
The real estate market, especially the housing market changes dramatically with tax code changes. Standard deduction and other tax cuts help more people to buy new homes.
Using derivates by banks
The real estate market can crash when the banks started investing in risky projects. Banks slice mortgages and re-sell them in MBS (mortgage-backed securities) for covering bad mortgages with good ones.
Increase in the number of flipped homes
Flipping homes was a major contributor to the 2008 recession. Now flipping has reduced considerably. Around 5.1% of all homes were offered for resale in the 3rd quarter of 2020. It is less than the 2020 2nd quarter filigree of 6.7%
Plummeting of affordable housing
When the housing market blooms, it hikes the price. And, the shrinking of available affordable housing is another sign of a crash.
Rising sea levels
Real estate markets are likely to collapse in the coastal areas. Studies conducted by the Union of Concerned Scientists indicate that 311,000 of today’s Florida residential properties will have chronic flooding. It will create havoc in the real estate market by 2045.
An official warning is also an indicator of a real estate crash. One must be attentive to this when other signs are flashing red. Parting words Some of these signs of a real estate crash have shown, but many of them have not. It seems that the US real estate market is less risky than it was in the mid-2000s.
Until next time, Reza Abbaszadeh