7 Signs That a Housing Crisis May Be Coming

The real estate market has not been going the way many prospective homebuyers had hoped this year. Rising prices, building delays, rent moratoriums, and volatile mortgage rates have made buying a house increasingly difficult. Sales of existing homes have dropped and are trending below 2019 levels.

As fears of a larger economic recession loom, the housing market is showing signs of a slowdown. Here are seven signs that the real estate market may be starting to change.

One of the first signs that the housing market is going to dip is the overall economy. While housing markets are intensely local, and a dip in the market may vary from neighborhood to neighborhood, a good overall indicator of the national state of affairs is how the economy is doing.

The economy affects the supply and demand for houses. If the economy is up — unemployment is low, consumer confidence is high — more people are going to be buying and selling homes.

When the economy is down, people have less money to spend on housing or they are unsure of their financial future. Sellers may have trouble finding a buyer for their home and will in turn decrease the price of the home to help it sell.

Rising interest rates are a huge indicator that the housing market may be cooling off. When interest rates are low, there is a greater demand for property. People want to lock in a great interest rate when they buy a home.

But when mortgage interest rates start to increase, people are less likely to buy. When demand for houses declines, sellers will have a harder time finding a buyer for their home, which may lead to lower home prices.

The funny thing about any market is that it often moves based on how people feel about it at the time. If people start to feel uneasy about buying or selling, then it might be a good indication the market may crash. How confident people feel about the housing market is so important that Fannie Mae publishes the National Housing Survey each month. And the comfort factor affects each part of the housing industry.

If people aren’t feeling confident about buying houses, demand goes down. People aren’t going to buy housing if they’re unsure about their economic future. People want to buy houses when they’re confident it’s a good investment.

If people aren’t feeling confident about selling their homes and looking for something new, the supply goes down. This trickles down to builders and real estate agents. If builders foresee a lack of demand for housing, they’re going to build fewer developments. Real estate agents are trained to keep an eye on the market as well. If you want to know how your local market is doing, talk to a local agent.

Finally, if banks don’t feel comfortable lending money, fewer people have access to mortgages.

All these factors affect the market negatively, and together they can drive it to crash.

Homes are an appreciating asset. Every year, homes appreciate between 3.4% and 3.8% on average. This is because they are built on land, which is a limited resource. No one can make more land, and not all land can be built on. Therefore, it’s valuable.

When the housing market is hot, like it currently is, homes will appreciate faster. But if you start to see home prices plateau or depreciate, the housing market could be crashing.

Thankfully the S&P;/Case-Shiller U.S. National Home Price Index has tracked the average price of existing single-family homes since 1987. You can check trends there if you’re worried about buying just before the housing market might decline.

Federal Reserve Economic Data (FRED) tracks the supply of houses in the U.S. and how long it should take to sell them. In a balanced market, it should take about six months to sell all of the homes currently listed. However, when that shifts and the time it takes to sell all the homes increases, this could spell economic trouble.

More homes on the market means sellers have to compete more to make their home attractive to a buyer. You can make improvements to make your home more saleable, but the easiest way to move a house is to cut the price. When home prices are cut, it can have a domino effect throughout the market.

When there are more foreclosures, it means more people can’t pay their mortgages. It also means more houses will be on the market and oversupply will decrease prices. If your housing market has a lot of foreclosures, sellers will have to lower their prices in order to compete with the banks trying to unload the foreclosures. Foreclosures will affect the housing market as a whole.

Before the housing crisis of 2008, banks would encourage homeowners to take out home equity loans. These lines of credit were used to pay for new cars, college tuition, and other large life expenses. Since the economy was strong, no one was worried about paying them back, so they were abused.

Unfortunately that caused quite a problem when housing prices stopped increasing and people started to struggle to pay their bills. When the market crashed, many people owed way more than their house was worth.

Banks that held the purchase mortgage had first dibs on any money the borrowers had, and banks that offered home equity loans were paid second. This caused a banking war between lenders and furthered the economic crisis. To combat this, banks now are careful to provide HELOC loans only to well-qualified individuals, and many banks froze HELOCs in 2020 at the start of the pandemic.

The housing market may crash when supply outstrips demand. At the moment the issue is that while demand may be decreasing, supply isn’t improving fast enough to make up for it - but that can quickly change.  If you’re looking to buy a home, keep your eye on the market trends to ensure that we’re not headed toward a crash.