Spring is a common time for people to begin looking for a new home. This spring there is a lot of speculation on whether the real estate market is going to crash, or will it gently ease back into a modest correction? Common sense tells us it cannot continue the way it is presently and many factors could be responsible for a change:
- Supply will begin to keep pace with demand which will result in prices dropping
- Prices may reach a tipping point
- Potential home-buyers may lose interest with prices so high
No one can accurately predict what change the housing market is going to make or when as there are so many moving pieces and it appears to change each day. These are some of the pieces in place that affect the real estate markets.
1. The Future Looks Clear
The Federal Reserve is planning on keeping the prime rate low through 2022. If the prime rate is low, it will keep the rate banks’ loan money low as well. The interest rates should keep possible real estate investing or potential home buyers interested in searching for a new home.
2. Inventory Issues
Because there is an issue with inventory due to labor and material shortages, builders are not anywhere close to the pre-pandemic building levels. These low levels of inventory indicate house selling will likely continue to be set at higher-than-expected prices.
3. Cash Paying Buyers
Real estate investing with cash, when buyers have enough cash to pay the difference between how much is being asked for a property and how much a lender will borrow will eventually dry up. This dry-up of cash buyers could stabilize the markets as real estate investors are not prepared to pay top dollar on properties they want to turn for a profit.
4. History Repeats Itself
A look back in history reminds us that what goes up must come down. The Panic of 1837 when markets crashed is blamed on speculative lending practices, economic downturn, and unsustainably high land prices. This crash was significant.
Following the 1837 crash, there were dramatic ups and downs in the market and the economy kept getting shaken up. An example of these shake-ups is the stock market crisis in 1873. During this time homeowners were confident their house would make them money, and then suddenly the stock market dived.
Home prices soared a decade before the next stock market crash and dropped dramatically in 1929. At this time, families who were rich in property ended up with next to nothing. This crash also brought about the Great Depression, which further impacted the decline in property values. It took until 1960 before prices recovered.
In the early 2000s, almost anyone was granted a mortgage loan, and home prices quickly rose. By 2006, anyone who had taken out an adjustable-rate mortgage saw an increase in their payments, some by as much as 60%.
The markets slowed to a crawl in 2007 and soon crashed when hundreds of thousands of homes were put into foreclosure and lenders were forced to declare bankruptcy. These are just a few examples of how the history of house prices has been impacted, only to fall back into more realistic values.
What the Experts are Saying About a Real Estate Market Crash
Most experts agree that there will not be as significant a crash in real estate investing as there was in 2008. One reason for this is the legislative changes that have been put into place regarding lending practices.
History has shown the housing market peaks about every eighteen years and is then followed by either a small or large crash. This cycle is normal, and one we can expect. If you are looking to buy a home there are five ways to protect yourself:
- Don’t allow yourself to be caught up in a buying frenzy
- Do not buy more than you can afford
- Make the largest down payment possible
- Build an emergency savings account
- Consider refinancing
Even though it is not known when the prices will level off or come down, we do not know if it will eventually happen. The market cannot go up in value forever.
Learn More About Real Estate Investing
Realty Capital Finance is here to help you purchase, refinance, rehab, or perform a ground-up development of your residential investment property. Our programs allow you to receive a loan with no income verification and in most states, with a credit score as low as 620. Call and talk to one of your specialists today and learn how we can help you get started in real estate investing.