When the housing market crashes, it can have a ripple effect that impacts not just real estate, but also other industries and local businesses. When homes are no longer affordable due to high prices, buyers tend to shy away from making offers on properties. As a result, home values decrease and sellers have to adjust their prices accordingly. This is what happened during the housing crash of 2008. In that year alone, home values dropped by nearly 19 percent nationally. Prices remained mostly stagnant until 2012 when they began slowly increasing again. In fact, according to Trulia data , housing prices in almost all markets are approaching pre-recession highs once again. But how does that affect you if you’re thinking about buying a home? What exactly happens during a housing market crash? Keep reading to learn more.
What Caused the Housing Market Crash?
The housing market crash of 2008 was caused by a combination of economic factors, including rising interest rates, falling home values, and risky mortgage practices. In order to spur economic growth, the Federal Reserve decreased interest rates to near-record lows. This caused mortgage rates to fall as well, which led to an increase in homebuyers. Higher demand coupled with a limited supply of homes for sale led to rising home values. This was problematic because it left many homeowners “underwater,” meaning their mortgage was more than their home’s value. When home values drop, homeowners feel more comfortable selling their homes. When homeowners sell their properties, there’s less supply and even more demand. This creates a downward spiral that eventually results in a crash.
How Does a Crash Impact Homebuyers?
When the housing market crashes, it can make it harder for buyers to find affordable housing. Home sellers tend to drop their prices to make their homes more attractive to buyers. However, this can lead to the housing market overheating and prices increasing significantly. When inflation is high, consumer confidence tends to plummet. This can drag down housing prices and make it even harder for first-time homebuyers to find affordable properties. A housing crash can also impact rental prices. When rental prices drop, it can make it harder for people to afford to rent. A crash can also make it challenging for real estate investors to find tenants for their properties. When rental prices are high, it can make it harder for people to save for a down payment on a home. Furthermore, it can make it more challenging for people to live within their means.
Why Are Housing Markets Likely to Crash Again?
Over the past decade, the U.S. has experienced an unprecedented housing boom. People were buying more houses and renting was at an all-time low. However, experts believe it’s likely we’ll see another housing crash. In fact, several potential catalysts could trigger another housing crash. These include rising interest rates, declining homebuyer sentiment, and tighter regulations for mortgage lenders. Higher interest rates: When the Federal Reserve raises interest rates, it can make it more difficult for people to afford their mortgages. This can also make it more challenging for homeowners who have adjustable-rate mortgages (ARMs) to refinance. If ARM rates increase, homeowners who can’t afford the higher monthly payments could be at risk of defaulting on their mortgages. When home values fall below what buyers owe on their mortgages, they’re often required to refinance. This can be especially challenging for homeowners who took out loans during the height of the housing boom and are now underwater on their mortgages.
Tougher lending regulations
After the housing crash, the government created new regulations to protect consumers. However, some believe these regulations make it more challenging for first-time homebuyers to get approved for mortgages. In fact, a 2018 survey by the Mortgage Bankers Association found that many loan officers believe regulatory burdens make it more difficult for first-time homebuyers to get approved for mortgages. These regulations can be particularly challenging for people who don’t have enough money for a down payment on a house.
The Federal Housing Administration (FHA) makes loans that have lower down payment requirements. These loans have become less appealing to lenders since the housing crash. However, rising interest rates and tougher lending regulations can also affect homeowners who have FHA-backed mortgages and can refinance them without a significant increase in payments.
Ultimately, it’s difficult to say with certainty when the next housing crash will occur. Some experts believe we could see another crash as soon as 2020. However, predicting the housing market is notoriously challenging.
However, there are some things you can do to protect yourself if another crash occurs. One option is to look into a hybrid ARM mortgage. Hybrid mortgages allow homeowners to take advantage of low-interest rates while also protecting themselves against future rate hikes. Another option is to start saving for a down payment now. It may seem challenging, but it can be easier to save money when you have a savings plan in place.