The next housing crash will happen again in the unknown future. And just as it did happen 15 years ago, no one could tell the exact timing of it happening.
As part of an economic downturn, a housing crash will culminate from concurrent happenings of many variables within the entire economy.
Peter Lane Taylor, a Contributor at Forbes.com, says, “By the numbers, however, it’s becoming harder and harder to argue that America’s housing market isn’t already over-heating. Inventory in many regions has hit record lows. Days on market are now measured in hours.”
Peter refers to the case in Miami as a Super-boom, where realtors are experiencing effortless moments closing sale contracts for houses. We are all aware that markets don’t super-perform forever. So, soon, there should be a downturn. Buyers, too, are mindful of the situation to super-low interest rates. Buyers are rushing in to take advantage of the golden opportunity handed to them by post-pandemic economic events.
Here’s the current situation at a glance: prices are high, there are bidding wars for every saleable unit of housing. As if that’s not enough, the inventory to satisfy your choices is slimming every day. In rental units, occupancy has also spiked upwards away from the downturn lows of 2020.
Typically, it’s the best moment ever, being a homeowner, and the worst, being a home buyer.
As the heat rises, it will drop sharply very soon – a housing crash on its way.
But what should indicate to us that a housing crisis is on its way?
Here is a telltale list of ten signs that you should watch out carefully into the future. Also, I’m going to help elaborate sentiments from key actors within the housing sector. In each, I’ll show you what indicates a countdown towards an impending housing crisis.
Let’s dive in.
Number One is – The Bursting of Asset Bubbles
The bursting of asset bubbles is the tail-end effects of increasing prices without any fundamental basis. Eventually, prices become unsustainable and unreal.
Within the context of housing, prices and demand fall. So does unit spending. Essentially it happens as an economic downturn that culminates in the form of excessive recessions. Assets, homes inclusive, follow similar events regarding their pricing, valuation, and demand and supply.
An example of an asset burst is the decline in the price of Gold. At the height of the pandemic in August 2020, the Gold price rally hit the highest ever value of $2070. Ever since, to date, Gold prices have retraction hitting a record $1648 in March 2021.
Ask yourself, why is Gold losing value? Typically, there are better-return investments than Gold and key among them is the housing industry. Also, a recent pullback in the prices of Bitcoin is another indicator of an asset burst.
Past mid-April 2021, the price of Bitcoin is pulling back from the highest ever record high of $ 63,500, having lost over $9000 in less than 14 days.
Sudden falls in values of crucial assets like Gold and Bitcoin show you that the economy is now roaring back to recovery mode.
Let’s go to the Second Sign.
Number Two is – Upsurge in Unregulated Mortgage Brokerage Firms
Towards the Close of 2019, un-regulated firms accounted for more than half of the loans advanced into housing. A year before that, 6 of the ten largest brokerage firms were well-known Banks. You may wonder why preference is towards Banks. Banks are under the constant watch of the Central Bank and other regulatory bodies, while unregulated brokers escape the scrutiny of regulatory bodies.
If you look at the percentage shift, an increase of 3.1% tells you there’s a great pie in the brokerage industry. While they play a linkage role, upswings in demand for their service also increases room for the bad actors within their entire population. And that is a sign of exhaustion in demand for housing versus their pricing. You should watch for the downturn soon.
Lets’ see number three.
Number Three – Skyrocketing Interest Rates
Significantly high interest rates affect access to loans. By extension, it also slows down the rates of churning out new homes. While we hail the government for stepping in during the pandemic control and maintain low-interest rates, it’s not a lasting solution. Post pandemic interest rates favor medium and low-income earners who have an opportunity to own a home now. With the advance of time, stringent measures like subsidized interest rates and market rates for loans will shoot upwards. A housing crash will be in the blink of happening, and we’ll experience slightly high rates of foreclosures. But bear in mind that the increase in interest rates is not a situation any borrower can control at any time.
It’s one year since March 2020 when the FED set interest rates to 0%.
The reduction in interest rates is a monetary policy to help the economy back on its feet. The favourable spell has seen realtors take advantage of the situation, which only happened last in 2008. In the future, the rate will not be forever at 0%. When that adjustment comes, there’ll be a massive shake-up in the prices entirely. And housing, the current benefactor, will turn into a hot spot – the reality is credit will be too expensive for mortgage aspirants. The demand for housing units will fade away into normalcy, where only those with slightly high disposable income can afford.
The upward adjustment in interest rates will be a signal for the crash in housing.
With close relation to interest rates are yield curves. Let’s get to number four.
Number Four – Inverted Yield Curve
An inverted yield curve typically happens when investors prefer long-term investments in place of holding assets like housing. Investors prefer bond and growth stocks. They perceive long-term holding to be less risky. Under such circumstances, short-term Investments like housing supply slow down at the worst, significant investment shifts from housing and two other seemingly less risky or higher returning investments. History shows that an inverted yield Curve usually proceeds every considerable recession. According to thebalance.com, that’s been happening before the last four recessions.
Negative yields attract investors more than long-term investments and non-dividend assets like Gold. The overall effect triggers more interest, and in the case of housing, it loses the lustre and demand.
Therefore, when you see the long term yields dropping, it’s a sign of a downturn on the way. One of the industries to be hit is housing, and it will culminate in a housing crisis.
The government reacts using various ways to avert economic crises. And among them is affecting shifts in taxation models.
Let’s see more about tax adjustments in number five.
Number Five – Shifts in Tax Codes
Over time, some changes in codes of taxation results in a difference in income levels. And that affects various economic groups. And it favors a considerable part of mortgage holders, which means more purchasing power rests with the buyer’s disposal. In the long run, demand for housing outstrips the supply side. And that triggers shifts in the equilibrium of housing supply against demand. The result is a housing crash. Therefore, any tax changes should be in tandem with the long-term monetary and fiscal aspirations. It all boils down to the governments’ ability to balance the various economic groups comprising its economy.
Ideally, it’s not meant to favor the richest nor deprive the poorest. Whenever things seem to blow out of proportion within the tax equation, it’s a pointer towards a housing crash.
Taxation has a significant bearing on the financial health of an economy. While it involves excellent balancing acts among critical financial stakeholders, with a direction on the way financial institutions trade. Have they changed their risk appetites?
Let’s see Number six.
Number Six Banks And Financial Institutions Are Taking On Risky Derivatives.
Usually, if this goes on and is unregulated, it means the institutions struggle with unforeseen risks. Bear in mind that deposits within banks and financial institutions are depositors’ sums of money. Whenever or risk appetites are not put in control, there’s an impending higher risk. What happens if funds are lost?
Whether it’s out of error, omission, or negligence? In other words, it’s an imminent collapse of the financial institutions in general. And usually, the same collapse causes possible effects and impacts across investor interests – housing inclusive.
Therefore, anything complicated leading towards the collapse of financial institutions is a pointer towards a housing crash.
And perhaps you may wonder what other impacts can be felt within housing transactions? See number seven regarding flipping of housing units.
Number Seven – Lookup? For An Increase in the Rate of Flipping Of Homes
An impending housing crash sends forewarnings in the form of increased home flipping. Realtors target cheap homes, buy them and renovate them and dispose of them at higher prices. You can refer to it as a rush for the money instead of the entire housing industry’s value. It’s a trend that usually ends up with accommodating events – housing crashes.
From another viewpoint, stakeholders appear to have lost control of the entire situation. Usually, the period of holding and selling a home, including its renovations, falls within less than a year.
Ideally, whenever an economy fails to meet the demand for housing, flipping only comes in as a rampant measure. It cannot happen forever; at the tail-end, a trend reversal happens, and it culminates in the form of a housing crash.
What does it tell you when mouse flipping happens continuously? The realtors are taking over every available house there and profiting from minute refurbishments. It points towards diminishing housing units as prospects get weary with the pricing with time.
See number eight on diminishing affordability.
Number Eight – Diminishing Affordability of Housing
Under normal circumstances, housing demand and supply work within reasonable equilibrium. What happens when demand for housing outstrips its supply? Two critical metrics should be watched for. They include a significant shrink in affordable units. More so is an absolute drop in the rate housing supply, and the increase in demand drives up unit prices.
Where would the tenants get money to foot rental and mortgage payments? In most cases, wages do not rise in tandem with the needs of an economy. Over time, their saving ability to meet costs relating to mortgages loses momentum. In the end, hell breaks loose with the culmination of a housing crash.
Other global phenomena also play a demanding role in the impending housing crisis. Have you ever wondered if the seas and oceans have a part? Sure, they have one, and it relates to the rise in the shoreline.
Look at number nine, next.
Number Nine – Rising Sea Levels
You may wonder how this one hits the housing Industries. But upward shifts in sea levels force residents to flee properties along coastal waters. In the process, many homeowners lose property due to acts beyond their control. Unfortunately, global warming seems to ravage many industries concurrently.
Although it’s a global problem, if not addressed adequately, many will be affected, and their numbers add up to those who are homeless.
When pandemics hit, authorities may shift most focus on averting the effects and shelf other plans like meeting housing demands.
In a significant way, the rise in sea levels contributes to the housing crisis. There’s also another way in which housing may be at the brink of collapse. And the same can be picked from officials in key posts with affiliation to the housing sector.
So, let’s see what officials can help with. See number ten.
Number Ten – What Is The Word From Housing Stakeholders/ Officials?
Ordinary consumers may not have the benefit of the reality of the data at hand. At the same time, the stakeholders must also analyze the data keenly and genuinely. In case they put warnings out there regarding housing crashes, be on the lookout. They may not be so wrong every time.
Putting It Altogether – How Will The Upcoming Housing Crash Happen?
Whenever low-interest rates are in the picture, most people rush to take advantage of the mortgage availability to own a home.
Economies have many aspects playing together at exact times. Yet, the ten points we’ve shown above are probable indicators of a housing crisis.