When Will the Housing Market Crash?

Home prices have been booming lately, rising at their fastest pace in the last 15 years. A cocktail of record-low mortgage rates, low inventory of homes, and people looking to upgrade during the pandemic has pushed the median-priced, single-family home to an all-time high. The growth can be seen just about everywhere, from small towns to big cities. 

Photo by Blake Wheeler on Unsplash

This unprecedented growth has many people starting to ask: When will the housing market crash?

The question of “when will the housing market crash?” is a million-dollar question. Actually, it’s a $3.3 Trillion-dollar question; that’s how much homeowners lost in equity in 2008. If it were more predictable, than it probably wouldn’t be so catastrophic. Since no one has a crystal ball, all we can do is understand the possibilities and be prepared. 


When Will the Housing Market Crash?


That’s about the most accurate statement that can be guaranteed. Even then, maybe it doesn’t crash; maybe it just dips, or kind of stays flat while economic fundamentals catch up. While we can’t know the future, we can make our best educated guess.

Ultimately, housing prices, like the prices of most things, is a product of supply and demand.

  • Supply – How much of a good, service, or asset is available.
  • Demand – How much people want (and are willing to spend) for that good, service, or asset.

If there is a lot of supply and/or little demand, the item will be cheap. If there is little supply and/or high demand, the item will be more expensive.

You might be thinking “well, duh.”, but let’s look at what this means for housing.

Factors That Affect Housing Supply
  • How quickly new homes are being built
  • How quickly existing homes are being vacated
    • Also with the pandemic, economic uncertainty has made some homeowners reluctant to sell or make such a big change further contributing to lower supply and a rise in home prices.

Factors That Affect Housing Demand
  • Cost
    • For most homebuyers, the cost isn’t the sale price of the home, it’s the monthly payment. For a $300,000 mortgage at 4%, the monthly payment would be $1,432 (for Principal & Interest). With interest rates at 3%, one could now afford a $340,000 home on the same monthly payment
    • Interest rates have stayed so low because of the Federal Reserve’s decision to cut the Federal Funds Rate to 0% and hold it there until they see better signs of economic recovery.
    • These cheaper loans encourage people to pursue homeownership. As a result, we see higher demand and, again, rising home prices.
  • How many people are searching for a home
    • While the pandemic has encouraged some to hunker down, others decided to pack up and move, usually as a result of needing more space or being able to work remotely.
    • As discussed above, lower interest rates also make more homes (or bigger homes) affordable to potential buyers, so a lot of people are entering the market or looking for something bigger and better.
    • Yet again, higher demand and rising home prices.
  • Access to funding (income, savings, investments, or loans)
    • With rising home prices, homeowners have more equity available to them (in the value of their current home). Having this extra wealth on paper, means people are able to access even more credit. Perhaps, one may open a Home-Equity Line of Credit (HELOC) and use the money for a down payment on a rental property. Thus, a further increase in demand and a corresponding rise in home prices.

As you can see, pretty much everything is pointing towards rising prices right now, but what might change that would cause the housing market to crash (or at least cool off a little bit)?

Changes That May Alter the Course of the Housing Market
  • The Federal Reserve raises interest rates which makes homes less affordable — less demand
  • The pandemic continues to slow the economy and unemployment remains high (i.e., fewer potential buyers that have the income or savings to purchase a home) — less demand
  • The pandemic ends and suddenly thousands of people feel ready to list the homes they were sitting on — more supply
  • The currently higher unemployment makes more employees available to homebuilders who can now build faster with a larger labor force — more supply

This list is not complete, and it’s impossible to say if all (or any) of the above will happen. It’s also difficult to quantify how extreme the change will be and how that will ripple through the housing market. For example, interest rates going up half of a percentage point is much less impactful than interest rates going up several percent.

These are some of the things you may want to keep on eye on. And in the meantime…

Be Prepared

It’s impossible to know the future, but we can watch for patterns and trends to make sure we are prepared for whatever may happen. Whether you’re a seasoned real estate investor, or a first-time homebuyer, you should always, always, always keep your investments diversified and have an emergency fund. If there is a housing market crash, you don’t want to be stuck having to sell your home at a loss. Following a crash could also be a great opportunity for discounted investments.

Lastly, don’t get caught up in FOMO. Just because houses are selling like crazy doesn’t mean you have to jump on the bandwagon. In fact, sometimes it can be better financially to rent.

What do you think? Will the housing market crash? Let me know in the comments!

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