Signs of a Housing Market Crash – Will the Housing Bubble Pop?

Perhaps it’s hope or greed, but no one likes to consider the possibility they’re buying just before a housing market crash.

Compared to other asset types, over the last fifty years, its unsual to see bubble in the housing market which is immediately followed by a crash; The last obvious example was the Credit Crisis.

This could be due to the high transaction costs of selling a home as well the cost of owning and maintaining a home, all of which discourage speculative behavior.

However, property markets do occasionally experience moments of irrational exuberance, with prices rising rapidly before returning to normal.

Signs That the Housing Market Will Crash

Will We See a Housing Market Crash?

Whether you’re a homeowner or a buyer, the prospect of a housing market collapse is scary. The last thing you want is to own a massive, inflated asset while the economy is collapsing.

Nevertheless, the housing market can outperform when the rest of the economy is weak and vice versa.

So, how can you know whether the property market is on the verge of collapsing? While there are some major trends in the housing market, here are the key signs the market is turning south. 

1) After an Extended Period of Acceleration, Home Prices Plateau

If one of the trends in the housing market is year on year, consistent real estate price increases, it indicates the possibility of an impending crash or at a minimum, a more benign correction.

Because there is a finite amount of land, it appreciates (and not all land is buildable). The average annual increase in the price of a home (including the land) is roughly 4%.

Home appreciation and the real estate sales market are affected when home values level out or plateau.
When a sufficient number of sellers cannot find a buyer for their property, they may reduce the price to attract more purchasers.

Housing market buyers and real estate investors who want to research more about house prices should use the Case-Shiller home price index.

This illustrates the change in home prices since 1987 and is available on the St Louis Federal Reserve website.

Homebuyers can blame the current housing crisis on a complex supply and demand situation.

The basic concept of supply and demand states that the less of anything customers want, the more price they are willing to pay.

The greater their demand for housing, the larger the mortgage they will take out.

The initial premise when the United States began sheltering in place due to the epidemic in 2020 was that doing so would deter people from buying homes. Instead, the opposite occurred.

The housing market is exploding as millennial buyers take advantage of historically low borrowing rates to purchase homes.

As builders complete more new homes and the number of people selling rises, lower prices could be. Lesser prices will prevail once purchasers are not part of bidding wars.

2) Numerous Risky Mortgages

When we start to see lower mortgages expanding in the market, it’s another warning that a crash is on the way.

Higher mortgages could create a housing catastrophe if lenders relax underwriting credit standards and riskier mortgage requirements.

They can be offered to buyers who can’t genuinely afford the homes or for home sales when the properties are priced higher than their market value.

On the other hand, if lenders begin to relax their requirements to accommodate an excessive number of higher-risk borrowers, it could result in a housing bubble (artificially inflated property values) followed by a housing market crash.

This is why it’s crucial to learn about lending criteria, particularly for higher-risk mortgage loans.

Also, when we see a rise in the market for riskier mortgages and looser credit requirements, it’s another sign that home prices are likely to collapse.

Higher-risk mortgages might cause a housing crisis if lenders reduce underwriting criteria. Lending restrictions might be imposed in bulk on homebuyers who cannot afford a home or on home sales when the prices are higher than the market’s worth.

If lenders continue to reduce their rules to accommodate an influx of higher-risk customers, a housing bubble might emerge (artificially inflated property values) which might eventually cause a collapse in the housing market values.

3) Cautious Real Estate Agents and Builders

Few people are better equipped to foresee future housing problems than real estate agents, who have years of experience in the local market.

However, as a prospective buyer, you should pay attention to any warnings or negative feelings they express.

Real estate agents can also flag the early signs of a housing market crash. Agents are well-positioned to identify problems as they arise on the ground; thus, their feelings and confidence about the situation might be telling.

Similarly, the prices provided by builders might reveal information about the current health of the housing market.

Price increases are common during the selling season, so any price reductions you find could indicate they’re worried about what’s to come.

When it comes to builders, keep an eye on price cuts.

As the summer season nears, builders are usually very on top of things, and they typically hike prices as the selling season approaches.

If you notice them making price cuts, it is a sign that they’re apprehensive about where things are progressing.

4) Rental to Capital Values

Comparing rental prices to capital values is one of the best strategies to forecast a housing bubble when the underlying economic fundamentals of a property change and the rental and capital values of that property alter at the same time.

In the event of a bubble, however, speculators inflate capital values to make even more money. However, rental values do not increase since tenants do not notice a change in the property’s value.

As a result, there is a big difference between rental and capital values in such markets, which can be considered a sure bubble symptom.

5) Wages to Capital Values

Another way to determine affordability is to compare the annual income of an average person to their neighborhood’s capital values.

The outcome will tell us how many years a person will have to work to buy a home in a specific location. The workers’ median wages in one particular area are generally used to calculate average wages.

Numbers between 5 and 10 indicate affordability. If a person can afford a house with 100% of their earnings in 5 to 10 years, they can afford one with a 20-year mortgage. If the number exceeds 20, though, it signifies a bubble.

6) Absorption Rates

Housing inventory is the polar opposite of absorption rates. The number of unsold properties in a market is known as housing inventory at any particular time.

On the other hand, absorption rates indicate the number of residences purchased in the market over a specific time period. This figure is usually derived from the number of petitions for property title transfers that the government receives. 

The absorption rate indicates how quickly or slowly houses in the real estate market are selling. The absorption rate does not account for surplus properties on the market at different times. Because this only provides a figure based on the most recent data available.

A rising number indicates a bull run, whereas a dropping number indicates a bear run.

The word absorption rate is a metric used in the property market to assess the pace at which available houses in a particular area are sold over a given period of time.

It is computed by dividing the total number of available homes by the number of homes sold in the allowed time period. This equation can also calculate the amount of time it will take to sell the supply.

A high absorption rate indicates that the supply of available houses is fast shrinking, implying that homeowners will sell their homes in a shorter time frame.

Higher than 20% absorption rate has traditionally indicated a seller’s market, with properties selling swiftly. An absorption rate of less than 15% indicates a buyer’s market, in which homes are not selling as quickly.

7) Interest Rates are Rising

Interest rates could indicate that the housing market can collapse. Lenders compete with one another by leveraging current interest rates, among other things, to attract buyers.

Since they use similar variables to determine interest rates, lenders’ rates will often coincide.

When mortgage interest rates rise, buyers may find that they can no longer afford to spend as much for a home, forcing sellers to go through the painful process of lowering their asking prices and expectations.

You can predict what will happen next if you understand how interest rates work on a mortgage.

Rising interest rates are a clear sign that the home market is getting cooled. When interest rates get low, the property is in more demand.

When people invest in a house, they want ta low interest rate, and people are less likely to invest in a house when mortgage interest rates rise.

Sellers will have a more challenging time finding a buyer for their home if demand for houses falls, leading to lower home prices.

An increase in interest rates makes homeownership expensive for some buyers and renders the home they already own unaffordable in some cases. This situation frequently leads to default and foreclosure, which eventually adds to the market’s existing supply.

Moreover, rising interest rates will significantly impact large-ticket purchases like houses and autos.

Rates can rapidly mount up to tens of thousands of dollars (or hundreds of thousands of dollars) in additional interest charges over the expected timeline of an average mortgage in the housing industry.

8) Cautious Lenders

A lack of buyer confidence isn’t the only indicator of a property market meltdown, and there’s also a lack of trust among lenders!

After all, these businesses make money by charging borrowers interest on the loans they provide. Therefore, if they are anything but hopeful about what is to come, it is worth noting.

Most of us require a mortgage to purchase a home, so if lenders are not optimistic about the housing market, it’s a warning that it may be in trouble.

Fannie Mae‘s quarterly lender sentiment survey tracks lenders’ expectations about their profit margins, mortgage loan demand, and mortgage refinance demand.

You can stay up to date on how lenders are experiencing and what they are presently doing and the nature of their market expectations.

The highlights of the survey towards the end can be very informative. Although bear in mind that this is quarterly data, the situation may be obsolete depending on when you’re looking at it.

9) Houses Stock Surplus

Excess inventory is one of the most significant indications of a housing market crash. The monthly “supply” of houses determines how long it will take for all the homes currently on the market to sell at the current demand rate.

The supply in a healthy or balanced market is around six months. If the months of supply are less than six, the market is most likely a seller’s market.

There will be more than six months’ supply in a buyer’s market, and it’s a simple supply and demand situation.

Suppose the supply of available properties on the market grows faster than demand. In that case, it’s an indication that there are more sellers than buyers, and there’s a reasonable probability of a housing market crash.

When the demand has peaked, it puts supply and demand back into balance and limits the rapid rise in housing prices that some homeowners, particularly speculators, rely on to keep their purchases cheap or lucrative.

Those that depend on rapid price appreciation to purchase their properties may lose their homes if it stagnates, bringing additional supply to the market.

The Federal Reserve Economic Data (FRED) monitors the supply of homes in the United States and estimates how long it will take to sell them. It should take around six months to sell all of the homes currently on the market in a balanced market.

However, if this trend continues and the time it takes to sell all homes increases, the economy may suffer.

Because there are more homes on the market, sellers must compete to make their homes appealing to a buyer. You can modify your home to make it more saleable, but the quickest way to sell is to lower the price.

When sellers reduce property prices, these reductions can trigger further decreases throughout the market.

10) Cautious Buyers

One of the strange things about the economy is that it’s a self-fulfilling prophecy: if people believe the housing market isn’t doing well, it is likely to collapse.

Experienced investors know the money pain of a housing market crash, so it’s understandable if they are cautious.

When it comes to determining whether it’s the right moment to purchase or sell, the general consumer attitude is a good indicator.

The interesting thing about markets is that they frequently change based on how people feel about them at the moment.

When consumers become hesitant about buying or selling, it’s a sign that we might be about to witness a housing market crash.

The National Housing Survey, conducted by Fannie Mae every month, measures people’s confidence in the housing market.

The comfort factor has an impact on every aspect of the housing sector.

Demand goes down when consumers are not sure about investing in a home. People will not buy houses if they are uncertain about their finances, and people desire to purchase residences if they believe they will make a good investment.

Understand customer behavior over 4 to 5 months to observe if it is the right time to invest. Consumers understand that the property market crisis is not the most appropriate time to go for a sale; however, this is the right time to buy undervalued properties. 

Consumers will likely think that it’s a good time to sell when the housing market is thriving, and they’re likely to be hesitant about whether it’s a good time to invest when the housing market is booming.

According to a Fannie Mae survey conducted in February 2022, 70% of customers say that now is not the right time to buy a home.

Only 43% of respondents believe home values will improve this year, while 58% believe mortgage rates will rise. Furthermore, 17% of those surveyed are anxious about losing their jobs.

Consumers are getting increasingly pessimistic about potential purchases and sales. In addition, many customers say their household income is much lower now than it was a year ago.

Job insecurity may influence prospective homeowners. Prospective home buyers are concerned about the long-term financial commitment of mortgage debt.

11) Increase in Foreclosures

Foreclosure activity is increasing, according to a new report from ATTOM Data Solutions. Even though home foreclosures were down last year due to lockouts and moratoriums, foreclosure filings have increased.

It’s unfortunate when people can’t pay their mortgages and have to foreclose on their homes. However, it signals a housing market meltdown when it happens on a large scale.

When a homeowner defaults on their mortgage payments, the bank reclaims custody of the property and sells it at auction.

For instance, in 2006 and 2007, several borrowers had asked for and got mortgage loans that were too costly to pay, and unexpected growth in house sales led to increased demand for houses and real estate speculation.

Subprime borrowers (particularly those with adjustable-rate mortgages) found themselves unexpectedly unable to keep up with monthly mortgage payments following the Federal Reserve’s recent interest rate hike (to combat inflation). 

Failure to make these payments led to the foreclosure of millions of home buyers, causing a sharp drop in house prices, a rise in financial difficulties, and the eventual implosion of the housing bubble.

Unfortunately, the real estate bubble significantly impacted the United States.

Many websites can keep you up to date on foreclosure patterns and statistics, which you can keep checking. Start with a search of foreclosure filings and activity. It indicates if foreclosures are increasing or decreasing.

The local market may not necessarily reflect the national market. Locally, there might be a low foreclosure rate, while the foreclosure rate is rising in the rest of the country.

To better understand where we’re going, compare this month’s foreclosure rate to last month’s and last year’s. An increase in foreclosure rates usually indicates that people have financial difficulties and that an area is becoming more vulnerable.

12) The US Economy is Weak

The housing market isn’t just a vast, national entity; it’s highly localized. However, while housing runs independently from the rest of the economy, it does not exist in a vacuum.

The overall economy is one of the earliest indicators that the housing market will fall. While property markets are very local, and a market downturn can differ from neighborhood to neighborhood – a good overall indicator of the national state of affairs is how the economy is doing.

The economy has an impact on housing supply and demand. More individuals will buy and sell homes if the economy is doing well – unemployment is low, and consumer confidence is high.

However, if the economy is not doing well, people have less discretionary money to spend each month because of the quick rise in inflation. Their salaries and weekly income are not increasing at the same rate.

Home prices, however, are influenced by supply and demand. Due to an excess of homes, home prices will fall even if inflation is strong.

Interest rates and rental costs tend to rise as inflation rises, and long-term bond yields and mortgage rates follow the same pattern.

If mortgage rates become too high, fewer people will take out home loans, and home prices will fall as demand declines.

The overall economy is one of the earliest indicators that the housing market will tank. While property markets are very local, and a market downturn can differ from neighborhood to neighborhood – a good overall indicator of the national state of affairs is how the economy is doing.

The economy has an impact on housing supply and demand. More individuals will buy and sell homes if the economy is doing well – unemployment is low, and consumer confidence is high.

However, if the economy is not doing well, people have less discretionary money to spend each month because of the quick rise in inflation. Their salaries and weekly income are not increasing at the same rate.

Home prices, however, are influenced by supply and demand. Due to an excess of homes, home prices will fall even if inflation is strong.

Interest rates and rental costs tend to rise as inflation rises, and long-term bond yields and mortgage rates follow the same pattern.

If mortgage rates become too high, fewer people will take out home loans, and home prices will fall as demand declines.

13) Fear of Missing Out

Higher home prices are due to various factors, including rising material costs, supply chain disruptions, increased disposable income during the epidemic, low-interest rates, and easy credit access.

According to the Dallas Fed, the upswing has gone beyond fundamentals.

When property prices rise, new investors experience a fear of missing out, while established investors engage in more aggressive speculation.

Buyers race to acquire homes and investment properties before prices climb further, fearful of missing out on low borrowing rates. The stock market soars due to the “fear of missing out” (FOMO).

Does the high price-to-rent ratio signal the onset of a property bubble and a subsequent drop in house prices. ? 

It’s easy to get caught up in FOMO, but you also need to think about the best option and when to make it. If you wait to buy a better asset, you might achieve greater financial success than buying a lower-quality investment. The goal is to get good, impartial advice.

Suppose people lose their jobs because of the recession and cannot pay their mortgages. In that case, this will impact the overall economy, and there will be a point when this causes an adverse price reaction in the housing market.

People have less money to spend on homes when the economy is down or unsure of their financial future. If a seller has problems finding a buyer for their home, they may lower the price to help it sell.

It’s important to understand that the presence of one of these indications is not always a concern, however, they may be a solid clue that the housing market is going to collapse in a short time if you notice any such signs in a short period.

Final Word: Will the Housing Market Crash?

Being able to tell when will the housing market crash depends on a variety of factors. After everything is said and done, you must ask yourself the following questions: Is real estate still selling in your neighborhood? Are prices fluctuating rapidly? Is there a lot of pressure to sell quickly?

Is there a high number of foreclosures? Housing market buyers and investors need to be able to see through real estate agent hype and bluff.

Answering these questions can help you understand how your local housing market is doing, but there is no precise formula for predicting whether or not a housing catastrophe is imminent.

An experienced local realtor can assist put your questions in perspective if you are not sure about what you are seeing in your particular market.

More From Wealthy Living

Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.

Tim Thomas has investments in real estate.

This post was produced and syndicated by Wealthy Living.

Featured Image Credit: Shutterstock / Fizkes