Is The Housing Market Crashing?

Is wondering if the market is crashing keeping you up at night? In this episode of We Know Henderson, I'm going to talk about the current market dynamics that might be different from those in the past. We’ll look at the numbers so you can decide if buying or selling right now is the best option for you.

What’s Going On With The Market?

First, I'm going to say clearly: the market's not crashing. Rather, there’s a supply and demand issue. With low inventory, people are clamoring and paying over list price in many cases. While we know that the market's not crashing, will the market crash?

Many people look at our current situation and say, "It's a bubble, look at how fast it's going up." It reminds them of 2003-2006, right before the major crash of 2007-2011. However, we've got to look at a few different dynamics that are completely different now than the last time.

Loose Lending Practices

One of the first differences is that lending practices a couple of decades ago had very, very loose lending practices. Lenders were lending to people based on no documentation whatsoever. It wasn't just that people stated their income, showing tax returns without W2’s. They were not doing any documentation of income. Someone could say they made $100,000 a year; the banks would say, “okay, here's your loan”. It was absolutely unbelievable.

They also had these things called option arms, which were negative equity loans. You had the option to pay just 1% of the entire price of the home on an annualized basis. So if you had a $500,000 home, you’d pay $5,000 a year and a little over $400 a month—plus your property taxes and insurance. It was a very, very inexpensive loan.

If your loan was at a 4.5-5% rate, that extra percentage went on to the balance of the loan. So while you borrowed $500,000, after a certain number of months it was $502,000, $505,000, $510,000, and $520,000—capping out typically at about 15%. This means you could ultimately owe $575,000 on a house that you bought for $500,000. By that time, as the market's crashing, you had no equity. There was no way to sell. Those loose lending practices led to the calamity that we saw in previous markets.

Today’s Equity

Because of the tighter lending practices and the way the market has been inflating over the last several years, there is more equity than ever in homes. What that means is that, even for those that went into forbearance as a result of COVID, they still have an opportunity to sell their home, pay the fees, and get out with money in their pocket. At the least, they’ll be able to break even.

The idea of foreclosures and short sales is much less risky than it was previously in the last crash. Does that mean that there are going to be no foreclosures or short sales? Certainly not; there will be, as some people bought with a down payment assistance program or at a minimum 3.5% down. However, those are the minority and not the majority.

One other thing to think about in regards to a correction is that there are risks all around us right now. The government has printed more money in the last year than it has pretty much in history as we know it. Quantitative easing has led to the potential for another risk factor, which is inflation—or even hyperinflation. If you read what some of the economists say, this is a major concern. So what should that mean to you?

Understanding Inflation

To illustrate what that means, let’s look at an exaggerated example. Imagine that a loaf of bread right now is $3 and, in a couple of years, that same loaf cost $4.50. You would want to see that related to the housing market, with a house that was $300,000 now worth $450,000. Additionally, wages that were $10 an hour would now be $15 an hour. That all would create inflation.

Let's say there is a housing market correction and that correction is 20%. That would mean that the $300,000 house that would have gone to $450,000 is reduced by 20%, or $90,000. This makes the house only worth $360,000. So if you happen to have $300,000 in your safe at home and you were thinking about buying a home right now, you could buy it for $300,000. The worry comes in if a crash causes inflation. You're still going to take that $300,000 out and be short $60,000, even after a 20% correction.

What's the risk of a housing market correction or crash, and what's the risk of inflation? Well, depending on who you speak to, those risks are about equal. They can both happen, neither of them can happen, or just one of them could happen. The only risk to you is if the housing market does correct or crash and inflation doesn't happen at all. Then you could see yourself in a scenario where your house is worth less than you're buying it.

Longterm Planning

Let’s throw in one more factor: how long are you planning on staying in your house? If you bought your house in 2007 or 2008, were comfortable with the payment, and love your home, all areas of the country have now crested back over the values that they crashed from. So as long as you stayed in the home long enough, it only took about 6-7 years from the bottom for the value to come back up in the last crash. If you’re committed to staying, you're going to be safe regardless of what the market does.

If you're looking for a home right now but are hesitating because of worry that the market's going to crash, make sure to consider all the factors. Think about everything different now than it was then, and consider the factors that are still happening today. Since these could offset different potentials for a crash or a correction, you should make a decision based on all the situation that exists now.

If you have any questions about the market or real estate, I’d be happy to connect with you and provide you with guidance. You can also subscribe to my channel so you never miss an episode of We Know Henderson. Make sure to stay tuned for my great real estate tips!