Will the Housing Market Crash?

By PropertyClub Team
Jan 2nd 2023
There have been all kinds of dire predictions about the current state of the economy, with many predicting a potential housing market crash. Housing prices have reached record highs in 2021 and 2022. But with rising interest rates and runaway inflation, the market had begun to soften, making many fearful of a potential crash in 2023. Here’s what you need to know about a housing crash.  

hash-markTable of Contents

What is a Housing Market Crash?
Signs of a Housing Market Crash
Brief History of Housing Market Crashes
Is a Housing Market Crash Coming?
Housing Market Crash Bottom Line

hash-markWhat Is a Housing Market Crash?

A housing market crash is when home prices decline rapidly due to broader economic conditions, either at a regional or national level. Home prices are expected to gradually increase over time because there is a high demand for housing but only a limited supply. But if prices are over-inflated and increase too quickly, it can cause a housing bubble. When housing prices are in a bubble, it’s only a matter of time before it pops and they come tumbling down, which is known as a market crash.

hash-markSigns of a Housing Market Crash 

  1. Softening Real Estate Prices
  2. A Downturn in the Economy
  3. Rising Interest Rates
  4. Increase in Foreclosure Rates
  5. Excess Housing Inventory
  6. A decline in Consumer Confidence
  7. Cautious Lenders and Real Estate Agents

1. Softening Real Estate Prices

Market crashes are typically preceded by a softening in the housing market, which means that decreased demand is leading prices to plateau or even decline slowly. This plateau can indicate that buyers are cautious of a potential crash and don’t want to purchase a home, only for the property to be worth substantially less a year or so later. While a pending crash isn’t the only reason demand may soften, a prolonged period of stagnation signifies an unhealthy market. 

2. A Downturn in the Economy

Housing market crashes often go hand in hand with a general economic downturn. Fewer people have money to buy homes if unemployment is high and economic activity is low. A decrease in the pool of potential buyers will lead sellers to reduce their prices along with the rest of the market, which will lead to a crash if the period of decline lasts long enough.

3. Rising Interest Rates

A sharp rise in interest rates can also have a similar effect on the housing market. If mortgage rates are high, it will be more expensive to finance a home. So, fewer buyers will be willing or able to accept a higher rate, especially if the rate hike is during an economic downturn. So, sellers must reduce prices to keep pace with the slow demand, which can lead to a market crash.

4. Increase in Foreclosure Rates

An increase in foreclosure rates is a surefire sign that the housing market is not strong and may collapse. More foreclosures mean more people can’t afford to pay their mortgages, which is often an indicator that housing prices are too high for the average American. Foreclosures will always happen, even if the healthiest of economies, but if there is a significant increase across the country, that’s a good sign that prices are in a bubble. As a result, fewer people will be able to afford homes.  

5. Excess Housing Inventory

Quality homes sell quickly in a strong housing market. So, an excessive amount of inventory may be a sign that a crash is coming. Housing prices follow the laws of supply and demand, so if demand is low, prices will follow. If quality homes sit on the market without any interested buyers, this could indicate that prices are in a bubble and buyers are scared of a crash.

6. A Decline in Consumer Confidence

Consumer confidence keeps the economy running, so any decrease in economic optimism can lead to a market crash. When people are confident in the state of the economy, they take out more loans and buy more real estate to take advantage of the favorable conditions. But when consumers are anxious about where the world is headed, they tend to be more cautious and save instead of buying. So, when consumer confidence is low, fewer people buy homes, leading prices to plummet. 

7. Cautious Lenders and Real Estate Agents

Lenders and real estate agents are typically the biggest proponents of buying real estate because it’s how they make their money. So, if lenders are warning you about getting a loan or your broker advises that now may not be the best time to buy, you know that trouble is brewing. They are also the most plugged in to what’s happening in the market and may not want to risk their professional reputation by advising you to buy a home right before a market crash. So, if your lender or broker is overly cautious, take this as a sign that something is amiss. 

hash-markBrief History of Housing Market Crashes 

2008 Housing Market Crash

The most recent market crash came in 2008 following a housing bubble brought on by the subprime lending crisis. Mortgage fraud was at an all-time high in the late 90s and early 2000s as loose banking regulations allowed unscrupulous lenders to give loans to unqualified borrowers, then sell those loans on the secondary mortgage market. Low-interest rates coupled with this fraudulent practice lead to an inflation in home prices. But foreclosures became rampant significantly as the Fed increased interest rates to combat inflation, eventually leading the market to come crashing down in 2008.

The Great Depression

When the stock market crashed in 1929, it caused a ripple effect across the entire economy, including real estate prices. During the Great Depression, housing values dropped by approximately 35%, even in wealthy areas like Manhattan. The effects of the 1929 stock market crash on housing eventually led to the development of the Federal Housing Administration and its loan programs aimed at helping low-income Americans become homeowners.  

The Panic of 1837

The panic of 1837 was a market crash in the early 19th Century brought on by speculative banking practices and a real estate land bubble. The crash followed several years of economic expansion, which led to an increase in risky, speculative investments, especially in land in the Western United States that had recently been open to development after the removal of Native American communities. The collapse of this market, coupled with a decrease in cotton prices and foreign pressures, led to a significant depression that lasted until the mid-1840s.

hash-markIs a Housing Market Crash Coming?

Although it’s impossible to predict exactly what will happen to the housing market, most experts agree that a crash is unlikely. While prices may begin to cool off and not rise as sharply as they did throughout the pandemic, that doesn’t automatically signal a crash. Despite the possibility of a recession, there is still a strong demand for housing and a relatively low inventory due to pandemic-related supply chain problems leading to a slump in new development. Plus, tighter banking regulations have made it almost impossible for unqualified buyers to get approved for a loan, which was a significant factor in the last crash. So, while price correction may be imminent, a total crash seems unlikely.  

hash-markHousing Market Crash Bottom Line 

Every investment comes with risks including real estate, which is traditionally seen as a safe bet no matter what the broader economy is doing. So, it’s important to be aware that housing crashes do occur, and your home can lose significant value in a short amount of time. If you are considering buying a home, pay attention to the broader market conditions and talk to your real estate agent to ensure it’s a smart time to buy.