Is The Market Going To Crash?

Have you heard that the housing market is going to crash but don’t know what to believe? In this episode of We Know Henderson, we’ll find out if a market crash is coming or not so you know what to expect. I’m going to talk about the market dynamics, what may cause a crash, and what will counter the potential for an actual crash.

Why People Fear A Crash

There are so many reasons why people can point to the market potentially crashing. For one, prices have gone up in a rapid fashion. We all know that homes priced at $300,000 just a couple of years ago may now cost $500,000 or even $600,000 in certain markets.

Additionally, interest rates are rising. That's going to scare people into not wanting to buy a home right now. However, we’re going to look at a few reasons that counter that position.

The News Cycle

The first thing to consider is that the media can fuel self-fulfilling prophecies. Think about it. If the media says that the economy is going into turmoil and people should save their money, what will people do? Well, we save our money. We tighten up on our wallets. We don't spend as regularly or frivolously as we may have in the past.

What does that do? Well, retail sales go down. Travel slows down, and other industries get hit. As a result, the economy does slow. Those companies now have to lay people off, unemployment goes up, and there's less money to spend. That whole revolving cycle of the economy—of somebody paying somebody else to paying somebody else paying it back—is now completely destroyed.

If we listen solely to certain articles we may read or certain news we may hear, we can cause our own crash.

Understanding Rates

You may have heard in the news that mortgage companies are laying people off, and Macs are talking 20-30% cuts. Let's investigate that a little bit deeper. Through the historically low rates that we were seeing over the past couple of years in the 3% range—and even dropping down into the high to mid 2% range—it was a phenomenal time for anybody that already owned a home to refinance. And that's just what people did.

Anyone that had creditworthiness, good employment, and solid tax returns was able to refinance their home. Now that we're seeing rates in the 4, 5, and even low 6% areas. There's no reason to refinance when you already have a mortgage in the low 4s or 3s—or even the high 2s. Without refinances, there's not such a need for the staffing that they had once before.

What you may not know is that over the past couple of years, refinances have accounted for 71% of loans. That's a staggering figure. So yes, people will be laid off, and mortgage application numbers are way way down. It only makes sense that refinances have effectively gone away.

Home Value Versus Inflation

Now, let's also talk about home value versus inflation. Most of us know what's going on with inflation. We're seeing it in gas prices, grocery prices, restaurant prices, and travel. Pretty much across the board, you're seeing things go up in costs.

Home prices are going to also reflect that. To think that inflation is going to continue to go up while house prices are going down, you've now got a double whammy there. Because we're also fighting inflation, home prices are still likely to go up. And even if they do take aggression, they’re still likely to be above where they are right now.

Previous Recessions

Now, we’ll look at the last five recessions. In the last five recessions that we've had, home prices have actually increased in four of those recessions. The only recession where home prices decreased was the Great Recession, otherwise known as the crash of 2008. That recession was almost solely based on housing.

This house of cards was built by poor lending practices and people way overextending. At that time, we had high inventory and low homeowner demand. Investors were coming in and snatching up all they could on no-documentation loans, and they overextended. When that demand dried up and there wasn't enough inventory for everybody, home prices naturally went down.

That's the way supply and demand works. When there's more supply and less demand, people on the demand side get to dictate a little more of what the prices are. In our case now, we have an extremely low supply and very, very high demand. Even if you thought the demand may go away because people might take them for a while, we still have a growing population and not enough rooftops to cover them.

We are going to need more homes regardless. The supply is still going to stay lower, and the demand will still stay higher—or at least balanced with that supply.

Rent Prices

During the last recession as home prices really inflated, rent prices did as well. For somebody that was looking to buy a home, they would look at a mortgage and see it would cost them $2,500 for their monthly housing payment. However, they could rent the same home for $1,700.

Why pay that $800 extra just because you can paint the walls the color you like or have something you call your own? It's not a prudent decision. When rent prices are far below what a mortgage would cost, a lot of people opt to rent and wait out that market.

In our current market, you can still buy a home for at or less than what the comparable homes are renting for right now. People can either give the money to a landlord and make somebody else rich or keep it for themselves. We have to face it. No matter what, we're paying mortgage; it's just a matter of if it’s our mortgage or somebody else's that will help them get rich.

Credit Card Interest VS Mortgage Interest

The last point that I want to hit on is something that is not talked about much. I’m sorry if this strikes a chord with you, but I've got to be real in all my videos. I want to talk to you about credit card interest versus mortgage interest.

Mortgage interest is all the news. It's all the rage. Everybody's talking about the rates going up and home affordability going down. You could afford a lot less house with the same amount of payment as a result of so much of it going to interest. Once again, it really doesn't matter how much goes to interest if the comparable house rent is going to be the same.

When renting, all of your money is going to rent—which is paying somebody else's interest and principal and helping them build wealth. You can do that for yourself. What I don't hear a lot of people talk about is credit card interest. There is an excessive amount of credit card debt in this nation. A lot of people come to me to help them find a home.

When we go through their financials with their lender, we find that they do have credit card debt. That credit card debt is oftentimes as high as 23.99%. Riddle me this: how is it okay to pay 23.99% of interest on a credit card to buy things that we don't really need yet paying 5.5-6% interest on a home that you're going to build equity in and build wealth in isn't?

I’m Here To Help

I hope this helped you understand what’s going on with the market and whether or not a crash is coming. As you can see, buying a house is still a great option. If you have any questions, feel free to reach out to me and I’ll be happy to help.

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