Is The Real Estate Market Going To Crash

If you’re a real estate investor you’re going to want to know if you’re investments are in a precarious state. In real estate, however, the precariousness of the state is not contingent upon on the state of the properties themselves as much as the state of the market as a whole. As 2019 approaches 2020, analysts have been making predictions about what to expect in the year and years to come.

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House Prices Return to Pre-Recession Peak

A study of 57 economies by Bloomberg revealed that it’s only recently that housing prices have returned to the position they occupied prior to the previous financial tumult.

What Conditions Could Cause a Real Estate Collapse?

The Balance believes that, in the United States, there are five conditions that may inspire the real estate market to crash: higher interest rates, risky financial instruments, the Trump tax plan, rising sea levels, and the return of U.S. Treasury notes inverting (this is known as the “yield curve”, which is when the return on long-term bonds is less than the return of short-term bonds). Other experts fear that the Trump Administration’s trade war with China will place the real estate market in a precarious state.

Which Housing Markets Are Most at Risk of Housing Bubbles?

According to Bloomberg, Canada and New Zealand are at the greatest risk of experiencing a real estate market collapse because of the discrepancy between the cost of housing relative to wages. The United States ranks at the 14th least sustainable housing market of all.

Why Has the Housing Market Slowed?

As reported by The Balance, housing markets have slowed in part because home sellers haven’t been able to sell their homes for the same price that they were sold in years prior. Average incomes also haven’t kept up with the cost of homes. Meanwhile, interest rates are higher than they previously were.

They Federal Reserve began raising the benchmark in 2015, which got people to get mortgages while rates were low, but after that demand began to diminish. By 2017, the median sales price of homes peaked at $337,900 in the fourth quarter; in the second quarter of 2019, that figure dropped 8.4% to $320,300. If the Fed resumes lowering its funds rate then the housing market may pickup again as homeowners once again take advantage of better deals.

What are Warning Signs of a Real Estate Bubble?

As The Balance reported, some warning signs of a coming crash are the ways in which the current market resembles the conditions of the previous crash. In 2017, for example, the median price of homes was 32% greater than inflation, much like the conditions in 2005 when homes were 35% overvalued. Additionally, the Housing Bellwether Barometer, which is an index of homebuilder and mortgages companies, grew in 2017 at an exceptional rate much like it did in 2004 and 2005.

Also in 2017, William Poole, a senior fellow at the Cato Institute, saw the same harbinger of a subprime mortgage crisis that he saw in 2005 as head of the Federal Reserve Bank of Kansas: that Fannie Mae and Freddie Mac were offering subprime loans at roughly the same rate. In 2017, however, Poole warned that the real estate market was in a more precarious state because the definition of subprime was lowered from a credit score of 660 to 620. Borrowers with a score between 620 and 660 aren’t even called subprime anymore.

There’s also more unregulated mortgage brokers now than there was during the time of the last collapse. In 2018, these unregulated brokers provided 52% of U.S. mortgages while in 2007 they provided 48%.

Four Reasons Why a Housing Crash Isn’t Imminent

As reported by CBS News in August 2019, there are some signs that the economy is simply slowing down rather than coming to a halt. While hiring has slowed it remains at a 50-year low. Jobless claims and construction permits, two other metrics of an economy’s health, also don’t indicate disaster.

Meanwhile, the yield curve inverting sometimes but not always precedes a recession. After three of the last 10 inversions, for example, the U.S. economy continued to grow. Historically, when a recession comes after an inversion, it’s within the span of 21 months.

Conditions That Could Cause a Collapse

CBS warned, however, that consumer confidence can lead both individuals and companies to stop investing. The Conference Board’s Consumer Confidence Index® is a trusted index, and it declined in September 2019 following a hint of decline in August. The Conference Board reported that 2019 in general was a year with fluctuating uncertainty and volatility, leading confidence to plateau. If the downward trend continues, the economy will further slow.

When Will the Housing Market Crash Again?

The popular real estate website Zillow conducted a research report in which it spoke with 100 real estate experts and economists. Nearly half of the respondents, Zillow reported, believed that a recession would begin in the first quarter of 2020. These experts believed the cause of the recession would be monetary policy (that interest rates would be high enough to discourage individuals and companies from taking out mortgages).

As reported by The New York Times, the Fed lowered interest rates in July, September, and a many Fed officials are predicting one more cut in 2019. Meanwhile, when Zillow polled experts the previous year they responded that a geopolitical crisis would be the cause of the next recession. Given the volatility caused by the Trump administration, it’s still possible, then, that a political crisis will spur the next recession.

Generally speaking, however, experts agree that a recession is on the horizon by virtue of how long the current expansion has been and the cyclical nature of the stock market. Real estate doesn’t have a one to one relationship with the stock market, but significant changes in one can affect the other. Dips, both small and large, occur regularly in the stockmarket. Over time, there is an upward trend, but only those who can weather the storm are able to benefit. As a result, the prognostications suggest that now is an excellent time to prepare for a recession.

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How to Protect Yourself from a Crash?

There are four things you can do right now to protect yourself from a crash or recession. Start by paying down as much debt as possible, starting with the smallest debts and then using the funds that become available afterward to tackle the next smallest debt. Concurrently, save as much money as possible, which should be easier to do as you have fewer debts to pay.

This whole time you should be budgeting. One popular technique is known as the zero method, which entails accounting for every dollar spent until you’ve run out of dollars. If you do have left over funds, use them to pay off debts and build your savings. You can augment the zero method with the 20/30/50 rule popularized by Senator Elizabeth Warren. That’s when 50% of your income goes toward needs, 30% goes toward wants, and 20% goes toward savings. Since you’re preparing for a crash, however, cut down on some wants (like daily coffee trips, eating out, etc).

Last, but not least, always keep your documents organized! This way you’re never caught off guard, whether you need to apply for a loan or file your taxes. This will also make budgeting, saving, and paying off debts easier since you’ll always be on top of things. That way it’ll be you who’s on top of the crash and not the other way around!

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