How Often Does the Housing Market Crash? Trends to Know

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By Clever Real Estate Updated October 21, 2021


If you're worried that a dip in housing prices is a sign of another housing crash, don't panic. Take a step back and think about all the factors that can affect the housing market in your area. Before you jump to conclusions, find out how often the housing market actually crashes.

How Often Does the Housing Market Crash? Trends to Know

There's been a lot of hype in the news in summer 2019 that the slow down in the housing market is an indicator that the market may be heading for a housing crash. People who remember the subprime mortgage crisis are afraid that the increase in house prices followed by a slowdown is a sign that another housing bubble is about to burst. But did the real estate market really experience a bubble?

There are many theories out there. But before you run out and put your house on the market because you're afraid it will be worthless next year, get in touch with an expert realtor who understands local real estate market trends so that you can get clear on whether what's happening in your local market isn't just a natural dip.

In the meantime, let's look at an overview on housing market crashes and what, if any, the tell tale signs are.

An Overview of the Subprime Mortgage Crisis

In the subprime mortgage crisis, the housing bubble was created by a demand for mortgage-backed securities which depended on the mortgages that backed them. So lenders, banks, and mortgage brokers gave mortgages out like candy with questionable lending standards.

Many of the mortgages were interest-only variable rate mortgages that had low monthly payments for a limited time. At the same time, the feds raised interest rates. Variable interest mortgage payments increased drastically with the higher interest rates.

Because many borrowers were given mortgages that they couldn't handle to begin with, they were unable to continue to pay the increased payments and began to default.

Meanwhile, home builders had caught up with the demand for houses and there was no longer a low inventory. Housing prices started to adjust to this lack of demand.

Mortgage holders who couldn't pay their mortgage now couldn't even sell their houses. As house prices fell, many people became upside down on their mortgage and the foreclosures began.

Keep in mind that this chain of events would not have been possible if the Commodity Futures Modernization Act of 2000 hadn't deregulated the trading of financial derivatives which are what mortgage backed-securities are.

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What is a housing bubble?

An asset bubble occurs when the price of an asset rises quickly over a short period of time and becomes inflated. An asset bubble can happen in markets such as housing, stocks, or even an industry, such as the dot com bubble in the late 1990s.

In housing bubbles, the prices of homes increase dramatically to levels that are unsustainable, the bubble bursts and people start to lose equity. But the reasons they are driven up and then burst can depend on a variety of other factors both in the financial markets and the government.

What are signs of a possible housing crash?

One sign of a possible bubble is a rapid increase in house prices like we have been witnessing over the past few years. But a crash is only eminent when a bubble bursts. Housing prices may have slowed down recently, but this doesn't mean a bubble has burst. It may just be due to a natural correction in the housing market.

Another possible sign is an increase in interest rates. While 2018 brought several interest rate raises which slowed down the market initially, the feds decided to cancel any further interest rate increases throughout 2019.

What are the natural cycles of the housing market?

The housing market basically works on a cycle of supply and demand. When there is a large inventory of houses, it's a buyer's market and housing prices tend to fall.

But when inventory is short, houses are in demand and it becomes a seller's market. It takes some time to build new houses and increase inventory again. Once inventory increases and demand can be met, housing prices slow down again.

Another reason housing prices have slowed recently is because people can't afford them. Income levels have not kept up with housing prices and many young adults of first-buyer age who are still strapped with student loans can't afford the added burden of a mortgage.

Meanwhile, high-end homes are priced too high for most folks. While there isn't a shortage of luxury homes, there is a low inventory of under $250,000 homes. This shortage is driving up prices of starter homes and buyers in the middle can't afford them.

What are some predictions of the next house crash?

There is much speculation about the next housing crash, especially because many people are still reeling from the damage caused by the last one.

76% of experts surveyed by Zillow in 2018 said that they don't expect market conditions to shift towards a buyers market until 2020. Some point to a recession beginning in 2020, after an unprecedented period of economic expansion. Others theorize that the slowing housing industry is the result of a crack down on foreign investments

Teo Nicolai of Harvard Business School believes the current slow down is merely a normal correction. He emphasizes that there are cycles that real estate markets move through that have been repeated since the 1800s which involve four phases: recovery, expansion, hyper supply, and recession. He believes that the current market is still in the expansion phase and we won't reach the peak bubble before a crash until 2024.

According to Fred Folvary, an economist at San Jose State University who predicted the 2008 crash, the housing market crashes in 18-year cycles Folvary also believes the next crash will occur in 2024 and lead to a great depression in 2026.

How can you know when to sell your house?

The bottom line is if you are thinking of selling your house because you see a dip in prices, don't panic. Remember that there are a lot of diverse factors that can contribute to dips and peaks in the housing market and many of them are both location and price point specific.

The best way to time the market to get the most for your house is to contact an expert seller agent who is experienced in your local market and knows its trends and when and why they occur. If your worried about losing the equity in your house and need some insight into timing the market, Clever can help.

Clever Partner Agents are top experts in their local markets and have been selectively vetted for both performance and experience. When you work with a Clever Agent, you will also save thousands in commissions. Reach out to an expert agent today and find out more about local market trends in your neighborhood.

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