Since the upswing of house prices in 2020, first-time home buyers and those hoping to find a deal on a house they plan to rent have been waiting and hoping for a housing market crash. Some equated the drop in the stock market in March 2020 to the Great Recession of 2007-09 and said it was only time until this “housing bubble” crashed and burned. While housing prices are unpredictable and particularly location-dependent, housing volume and availability are relatively simple figures to predict. Commodity prices, such as lumber, also obviously sway the cost of building.
“Since 1890, average housing prices have changed by 5% year-over-year nearly half of the time. For a new homeowner with a loan-to-value ratio of 80%, that’s a 25% swing in home equity value.” (Source)
A Plateau Ahead
While most experts are quick to say that housing prices have grown inflated over the last few years, they are slow to say it will be a crash. Instead, the housing market is supposed to slow down, have less demand, and perhaps plateau for some time.
Why not a 2008-style crash? For one thing, homeowners have more home equity today than they did a decade ago. Other reasons include consumers carrying less debt and fintech like Rocket Mortgage alleviating traditional banks from originating the bulk of new mortgages.
More importantly, the cost of materials and labor to build a home has risen in conjunction with housing prices. “Once investors account for the rise in skilled labor and commodity costs, home prices mirror those of 1950, a period that heralded almost three decades of flat housing prices.” (Source)
Rising Interest Rates
One thing that has already slowed the demand for houses is the ever-increasing interest rate. “For every 1% increase in interest rate over that period, housing prices have declined 18%.” (Source)
Today the average mortgage rate is 6.6% for a 30-year fixed loan, which is double the rates of 2020-21.
Time Will Tell
No one has a crystal ball in this housing market. We can’t be sure there won’t be a housing crash. Issuing subprime mortgages continues today, even though that was one of the main culprits of the housing crash of 2008.
Stay tuned to this market so you don’t miss a beat. Are you wanting to buy a home or an investment property? Connect with us at Fox Capital today!