When Will the Housing Market Crash Again in the US?

When will the housing market crash again? This has been a hot topic among real estate professionals and enthusiasts for quite some time now.

Table of Contents

1. When Will the Housing Market Crash Again?
2. What Happened in the Last Housing Market Collapse?
3. Are We Headed Down the Same Road?
4. What’s an Investor to Do?
5. Wrapping It Up

Several experts have already been discussing the potential of a housing market crash with some housing market predictions for 2022. And while no one can be certain if a market crash will take place, these conversations are worth having to prepare us for the worst. 

In this article, we will talk about the possibilities of the housing market 2022 crash, what some experts have to say about it, and how investors can prepare themselves for it. 

When Will the Housing Market Crash Again?

Talks about the housing market crashing have been going on since last year. We at Mashvisor have also touched on the topic from time to time to keep our subscribers and followers informed. We believe that it is a topic that should be discussed so we can help investors prepare for the worst. 

Since the last housing market crash of 2007 to 2009, real estate professionals and investors have been on the constant lookout for signs of overheating. The trauma caused by the last market crash coupled with the ongoing activity in the real estate sector has led to many asking the question “will the housing market crash in 2022?” 

For us to answer that, we need to backtrack to the previous 2007-2009 housing crisis that led to the great recession. 

What Happened in The Last Housing Market Collapse?

The origin of the recent housing crisis can actually be traced all the way back to 1999 with the subprime mortgage market’s unprecedented growth.

The Rising Popularity of Subprime Mortgages

A subprime mortgage is a type of mortgage that is suited for folks that have less-than-ideal credit scores and inadequate savings. This was the result of the concerted efforts of the members of the Federal National Mortgage Association, more popularly known as Fannie Mae. 

The goal was to make affordable housing within reach to folks who are not as financially stable and capable as others. Because they were considered high-risk borrowers, certain provisions were put in place to help them achieve their dreams of homeownership. Some of those were variable payments and higher interest rates. 

The intentions were altruistic and noble. However, Fannie Mae did not anticipate the danger this act would bring to the economy. 

Warnings Were Raised

Several industry experts and veterans warned against the potential dangers of subprime mortgages, especially when things started to get out of hand. Between Fannie Mae and Freddie Mac, about $3 trillion worth of mortgage credits were given out, which led to increasing mortgage default rates. These in turn led to a huge decrease in revenue for the two giants. 

Some of the most dangerous mortgages made available to subprime borrowers are the Interest-Only Adjustable-Rate Mortgage (ARM) and Payment-Option ARM. At the time, specifically between 1999 and 2005, these types of mortgages were essentially risk-free. Even if borrowers made low mortgage payments, because real estate properties appreciate over time, they were able to build positive equity. If they can no longer afford the new mortgage rates after a reset, they can still sell their properties and make a good profit from it. 

Life seemed good until it was not.

And the Market Came Tumbling Down

Alongside these new non-conventional and potentially lethal mortgages, the nation’s total consumer debt rate continued to grow at astronomical rates. By the time 2004 hit, we have reached the $2 trillion mark for the first time in history. 

During this time, investors took advantage of the increasing house prices with vehicles like mortgage-backed securities and credit default swaps (CDS). A CDS is a credit derivative designed to be a hedge against a company’s creditworthiness. While it works like insurance, it is unregulated and does not require CDS contract issuers to have a certain amount of money in their reserves to make payments for worst-case scenarios. 

That was what happened when American International Group (AIG) made the announcement of the huge losses in its underwritten CDS contracts portfolio that it failed to pay upon. Bear Stearns also suffered similar losses as did other companies whose investment vehicles were linked to the subprime mortgage market. 

Homeowners, including numerous investors, were defaulting on their mortgage payments as their variations of subprime mortgages kept resetting to higher payments while home values dropped. Now they owe higher mortgages and significantly lower-valued properties. Investors can no longer sustain their investment properties. House flipping was no longer a viable option. Homes were lost to foreclosure. Bankruptcies were being filed left and right. 

Government Intervention 

Between 2004 and 2007, things started to get really ugly and the government had to step in to provide bailouts. On September 18, 2008, the government started talking about providing aid and relief, which brought the Dow Jones score up by 410 points. The following day, then US Treasury Secretary Henry Paulson submitted a proposal for the Troubled Asset Relief Program (TARP). The proposal was to have a budget of $1 trillion to buy up toxic debt to avoid a national financial meltdown. 

On the same day, the Securities and Exchange Commission (SEC) temporarily prohibited the short-selling of financial companies’ stocks in hopes of stabilizing a market on the verge of collapse. Because of this, the Dow went up to as high as 11,483 and closed at 11,388. The following weeks will see how chaotic the market was at the time with the Dow hitting a low of 7,882 on October 10, 2008, the first time it closed below 10,000 since 2004. 

While good intentions got us on that downward spiral, the real estate industry has been abuzz with talks of a looming real estate market crash given the present market conditions. 

Are We Headed Down the Same Road?

By definition, a housing market crash is an event that takes place when there is a sudden and significant drop in housing prices. When housing market prices drop like a rock, its negative effects on the economy as a whole can be felt far and wide, like what happened in the 2008 Great Recession. It will result in countless job losses as well as a huge decrease in consumer spending. 

Talks about an inevitable housing market crash were highlighted with the COVID-19 pandemic and its economic impact. However, before we draw conclusions based on this, we need to understand what are some of the possible things that could lead to a housing crash.

4 Warning Signs of a Housing Market Crash

• Decrease in Demand for Homes: This is often caused by either a change in demographics or a recession.
• Increase in Housing Inventory: When there is an overabundance of housing supply from overbuilding or property foreclosures.
• High Debt Levels: Having a lot of debt makes it harder for folks to afford housing.
• Regulatory Changes: Changes in interest rates and the implementation of stricter lending standards could also result in a market crash. 

Perhaps one of the reasons why an impending housing market crash became the talk of the town was because of the stock market’s performance during the pandemic. Several financial experts compared what was happening in 2020 to the 1930’s Stock Market Crash that led to the eventual real estate market collapse at the time.  

The massive layoffs and furloughs greatly affected job security and income stability. These made it hard for people to pay off their mortgages and rents. Countless people also defaulted on their mortgages, which made selling their homes for as much as they owe on them near impossible.

However, unlike the 1930’s Stock Market Crash where homebuyer confidence was low, the pandemic surprisingly saw a spike in home sales before 2020 ended. This momentum kept going throughout the following year as homebuyers and real estate investors enjoyed historically low-interest rates. The low-interest rates made owning a home during a pandemic within reach for a lot of people, especially Millennials. 

Related: What Could Cause a Real Estate Market Crash?

The Likelihood of a Housing Market Crash in the Near Future

Why are we even talking about a housing collapse in 2022? Simple enough. Because several factors present in the past real estate crashes have manifested during COVID-19’s global onslaught: economic slowdown, decreased consumer spending, and stock market crashes. 

Global instability is also one factor to consider. Although it seems like we already have COVID-19 under control and we’re steadily recovering from its negative effects during its first year, we did not see the geopolitical conflict in Eastern Europe coming. This has caused unrest and instability in different economies which affected global supply chains that affect us as a nation. 

However, even with all of these things, it’s impossible to accurately predict if there will be a housing market crash in the near future. Housing market predictions for the next five years all seem to be very optimistic. But that doesn’t mean that all predictions and forecasts are sunshine and rainbows. The most common predictions involve the continuing increase in the following: 

• Demand for housing (especially among Millennials)
• Property prices
• Interest rates (albeit still considerably low)

Because the demand for housing is high amid a pandemic and there is very little inventory to go around, a lot of folks are saying that we could be in a housing bubble. For those who are unfamiliar with the term, a housing bubble takes place when the demand far exceeds the supply, which results in higher property price increase rates. 

Depending on which side of the fence you’re on, you may either see it as a bad thing or as an opportunity to take advantage of. The problem with this scenario is that investors and speculative homebuyers outbid each other and cause property prices to go up at alarming rates. Another concern is that when the supply catches up with the demand (whether from overbuilding or foreclosures), the bubble could pop and cause home prices to drop rapidly.

Related: Will US Housing Prices Drop in 2022?

What the Experts Have to Say

Despite the signs that point to a housing bubble, Forbes believes that the real estate market will stay hot based on their interviews with a few industry experts. Let’s take a look at what the experts have to say about it: 

Increase in Millennial Demand for Housing

Between Gen X and the Millennials—with Gen Z in tow—the number of homebuyers in America today is plentiful. The Millennials and older Gen Z make up more than half of the US population to date. This number and demographic are important because these first-time property buyers represent nearly a third (31%) of people buying real estate, according to the National Association of Realtors. 

Polina Ryshakov, lead economist and senior director of research for Sundae (a marketplace for distressed real estate properties), says that it is likely we will see a downward trend in the 2022 US housing market. Given the number of homebuyers below the age of 40, plus with Gen Z turning 30 soon, the buyer pool is deep. This implies that demand for housing, especially among Millennials and Gen Z, will continue to grow stronger as inventory plays catch up. 

Supply Isn’t Likely to Catch Up With the Demand Soon

The shortage in housing supply will likely continue over the next few years as the construction industry does its best to keep up with the demand, albeit at a much slower pace. This low supply fuels high demand, which then fuels higher prices. Experts agree that this will be one of the main reasons why the housing market will remain strong in the next few years. 

RealtyTrac’s executive vice president Rick Sharga agrees that the primary reason for the rapid escalation of home prices is this imbalance between supply and demand. He says:

And after not building nearly enough houses for the last decade, homebuilders will take several years at least to add enough new supply to balance the market.

In an ideal balanced market, it should take about six months for the housing supply to be depleted even at the current sales pace we’re seeing today. However, what we have today is only 1.7 months’ worth of inventory, which confirms that most markets today are sellers’ markets. 

First American Financial Corp. deputy chief economist Odeta Kushi anticipates that the imbalance will continue to push house prices upward even if they slow down from their peak growth pace in 2021. She also says it will take time to fill in the housing stock debt accumulated over the years of not building. 

Borrowers Are Highly Unlikely to Default on Their Mortgages

What’s different between what we have today and the early 2000s housing market crash are stricter lending standards and regulations. These were put in place due to the hard lessons learned back then. This simply means that those who qualify for housing loans are less likely to default on their mortgages as the screening process is much more meticulous now. 

No-doc loans are now a rarity today. Government-backed loans also have higher standards like minimum credit scores and down payments. Even regulators today expect lenders to verify a borrower’s ability to make regular and consistent payments, among other things. 

To put this in perspective, more than a trillion dollars’ worth of mortgage originations were seen in 4Q 2021 alone. 67% of those went to borrowers with credit scores north of 760, a score deemed “very good” by FICO. 

Zillow economist Nichole Bachaud has this to say:

Lending standards have gotten tighter and credit scores for new mortgages are much higher on average now than they were in the early 2000s.

Instead of a real estate market crash, she says that a gradual slowdown of real estate appreciation with prices continuing to grow is more likely to take place. 

What’s an Investor to Do?

Even if we don’t see the market crash soon, investors should know how to protect themselves from the possibility of it happening. Here are a few things real estate investors should do to safeguard their investments and finances:

Review Your Budget and Adjust It Accordingly

Desperate times, desperate measures. If, and when, things go sideways, it is good to learn to adapt quickly. Tightening your belt is one of the most practical ways to protect yourself not just from a housing crash but also against an eventual economic crisis. Have a realistic budget that allows you to live within your means. This is crucial especially when your income drops and your expenses go up. 

Stay Liquid

One of the most important things you need to prepare for during tough times is cash accessibility. You would want to have easy access to cash to take advantage of opportunities that could be found in a crisis. It doesn’t have to always be an investment opportunity like buying turnkey investment properties or short-term rental properties. It can be as simple as buying your weekly groceries at less expensive prices or moving to a location where the cost of living is a lot cheaper than your present location. 

Finance experts also highly recommend building an emergency fund with at least six months’ worth of cash that will allow you to live a decent life even if you don’t have a job. This money can either be put in a bank account or a secure place that can be easily accessed at any time. 

Diversify

Diversification is one of the surest ways to protect your investments and income. If the stock or housing market tanks, you still have other investment vehicles to turn to. As the saying goes: Don’t put all of your eggs in one basket. Spread your money out amongst different investment vehicles like stocks, bonds, mutual funds, cryptocurrency, commodities, real estate, and even virtual real estate. 

Avoid Debt at All Costs

This is perhaps the simplest yet most overlooked way of protecting your finances and investments from a market crash. If you can’t afford to pay it back, don’t take it up. And even if you can afford it, it’s not an excuse to accumulate debt. If the economy takes a turn for the worse, you will regret having debts to worry about. 

Reach Out to Professionals for Advice

Whether you’re confused about something or you’re absolutely clueless about financial management, we recommend reaching out to qualified and licensed professionals for guidance. They can help you make informed decisions based on your situation. 

If you’re an investor in search of good rental property investment to help get you by, a website like Mashvisor can help you make the best investment decisions. The site can help you locate the ideal property that lines up with your goals and shorten the entire rental property analysis process to a fraction of the time. 

To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo:

Stay Calm

Overreacting to a situation only makes this worse. In times of a housing market crash or recession, it’s important to keep your cool and not panic. Opportunity comes knocking even in the most inopportune circumstance. They come to those who are prepared and ready to take advantage of the open doors. Avoid making rash and emotional decisions that you could end up regretting. 

While these tips aren’t 100% recession-proof, they can help mitigate the adverse effects of a market crash and help tide you over. Implementing these may not make you millions now but they will help you sleep soundly at night knowing you’re prepared for the worst. 

Related: US Housing Market Crash 2022: What to Do as an Investor If It Happens

Wrapping It Up

So when will the housing market crash again? Nobody knows. Folks can speculate all they want, but the best way to address the situation is by staying informed, staying prepared, and staying disciplined. 

Start preparing for the worst by looking for the right investment property today. With the help of Mashvisor, you can find investment properties and make the most informed decisions according to your situation. 

To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.