Housing Crisis – 7 Key Signs It’s Coming

The real estate market has simply not been going as many prospective home buyers would have hoped with a potential housing crisis on the rise. Buying a house has also become increasingly difficult due to volatile mortgage rates, rent moratoriums, building delays, and rising prices. Sales of the existing homes have also dropped and are currently trending lower than the 2019 levels.

The housing market is showing signs of a slowdown as fears of a larger economic recession loom. Knowing what’s likely to lead to a real estate crash could potentially prevent you from paying too much for a home. Watch for the 7 signs highlighted below that the real estate market might just be starting to change.

I. Economic Downturn

The overall economy is one of the first signs that a housing crisis is coming and the market is about to dip. Housing markets are generally intensely local, and a dip in the market can vary from one neighborhood to the next, but how the economy is doing is usually a good overall indicator of the national state of affairs.

The economy usually affects the supply and demand for houses. If the economy is on an upward trajectory with high consumer confidence and low unemployment and there is no housing crisis, you can generally expect that more people will be buying and selling homes.

Conversely, if the economy is in a downward trajectory, people generally have less money to spend on home finance or are unsure of their financial future. Sellers may have trouble finding buyers for their houses, which in turn will lead to a reduction in house prices to help them sell.

II. Rising Mortgage and Interest Rates

Rising interest rates are one of the biggest indicators that the housing market may be cooling off. If interest rates are low, there’s usually a greater demand for property. People are always looking to lock in a great interest rate when buying a home.

However, if the mortgage rates begin to rise, people are usually less likely to make purchases. When there’s a decline in the demand for houses, sellers will find it more challenging to find buyers for their houses, and this may translate to lower prices, causing a housing crisis.

III. Declining Consumer Confidence and The Housing Crisis

The interesting thing about any market is that its movements are usually based on how people feel about it at the time. If people start feeling uneasy about selling or buying, then it could be a good indication that the market is likely to crash.

The level of confidence that people have about the housing market is so important that each month, Fannie Mae publishes the National Housing Survey. The comfort actor usually affects all parts of the housing industry.

If people don’t feel confident about buying houses, the demand usually goes down. People are unlikely to buy housing if they are uncertain of their economic future. People want to buy houses when they are confident that it is a good investment.

If people don’t feel confident about selling their homes and looking for something new, the supply usually goes down. This trickles down to real estate agents and builders. If builders predict a reduction in the demand for housing, they will build fewer units. Real estate agents also know to keep an eye on the market. You should talk to a local agent if you would like to know how your local market is doing.

Finally, if the banks are not comfortable lending money, it means that fewer people can access mortgages.

All the factors above can have a negative effect on the market, and together can make it crash.

IV. Decline in Soaring Home Prices

Houses are an asset that appreciates. Each year, homes appreciate between 3.4 and 3.8 percent, on average. The reason for this is that they are built on land, which is a limited resource. Nobody can make more land, and not all land can be built on, which is what makes it valuable.

When the housing market is hot, just as it currently is, houses will appreciate at a faster rate. However, if you start to see house prices either depreciate or plateau, the housing market could be crashing.

V. Increase in the Number of Homes on the Market

The supply of houses in the United States as well as how long selling them would take is tracked by Federal Reserve Economic Data (FRED). If the market is balanced, it should take about 6 months to sell all the currently listed homes. When that shifts, however, and there’s an increase in the time taken to sell all the homes, this could be an indication of economic trouble.

Having a higher number of houses on the market means that sellers must compete more to increase the attractiveness of their property to potential buyers. You can make improvements to your home to make it more saleable, but cutting the price is the easiest way to move a house. If house prices are cut, this may have a domino effect that affects the entire market.

VI. Increase in the Number of Foreclosures and The Housing Crisis

If there’s an increase in the number of foreclosures, it means that more people are unable to pay their mortgages. It also means that a higher number of houses will be on the market and the resulting oversupply will result in a decrease in prices.

If your housing market has too many foreclosures, sellers will be forced to lower their prices to compete with the banks looking to unload their foreclosures. Simply put, foreclosures will affect the housing market in its entirety.

VII. Increased Number of Homeowners Taking Equity

Prior to the 2008 housing crisis, banks would encourage homeowners to take out home equity loans. These lines of credit were used to pay for college tuition, new cars, and other large life expenses. However, the economy was strong back then, and nobody was worried about repaying them, so they were abused.

Unfortunately, this resulted in serious problems once housing prices stopped increasing and people started struggling just to pay their bills. Once the market crashed, many people owed far more than what their house was actually worth.

Banks that held the purchase mortgage were paid first while the ones offering home equity loans ended up getting paid second. A banking war between lenders broke out as a result, which worsened the economic crisis. To combat this, banks currently only provide HELOC loans to well-qualified individuals and many banks actually froze HELOCs at the beginning of the pandemic in 2020.

Housing Crisis Bottom Line

A crash in the housing market may occur whenever supply outstrips demand. Currently, the issue is that while there may be a decrease in demand, supply is not improving quickly enough to make up for this, but the situation can quickly change. If you want to buy a home, monitor the market trends keenly to ensure that we aren’t headed toward a crash.