With changing demand for housing and people buying and reselling homes (flipping) at increased rates, many are worried about a housing market crash in the near future. Market bubbles, like stock market crashes happen, however housing market crashes are arguably worse. In this post I will address whether there is likely to be a housing market crash in the near future and how to avoid being a victim of it.
How A Stock Market Crashes
For a stock market crash to occur numerous investors must rapidly and exuberantly buy stocks, this is where the stock market bubble inflates. Then investors must suddenly sell them, this is where the stock market bubble pops.
How A Housing Market Crashes
A housing market crash is a bit more complicated to develop. Housing demand drives supply lower and this drives home prices higher. Then to reach the demand, real estate developers build more. This increases supply and then prices decrease. Suddenly people realize their houses are worth less than they were originally and want to sell.
Is There A Housing Market Crash Coming?
Like stock market crashes, housing market crashes are not possible to predict. However, there are signs in which could be pointing towards the crash. But at the same time these signs could just be self-fulfilling prophecies. Either way, I do not believe the potential housing market crash will be like the crash of 2008.
Subprime, or more recently renamed as nonprime according to The Inc. is re-emerging. MPA says that this time it is different as they say “it’s a perfect storm; there is a lot that has happened in the last decade since the recession that has made the resurgence an essential element of the housing industry.” Now while I do believe that mortgages should be loosened in special circumstances, people can abuse this system very readily. Either way, with the average down payment of 6%, that is not exactly “prime.” This concerns me.
There are many uncertainties in the US economy, thanks at least in part to a particular person. However, I can see the volatility in the market as a blessing in disguise. Many people are hesitant to invest right now due to the uncertainties from the trade wars, the tax reform, and many, many more things going on. While this will stunt the growth of our economy I do not see the recipe for a large crash.
People need to feel optimistic and try to take opportunities they cannot afford for a major market crash to happen. If people are not very optimistic and not taking these opportunities, any economic hit in which either slows growth or even pulls the economy back will not be coupled with massive sales of assets. Therefore, I honestly believe whatever happens will be normal pull backs in the economy. However, uncertainties could add up into panic and when panic comes anything could happen, so I could be wrong. I hope I am not.
Here Is The Good News
It was previously believed that fewer millennials are purchasing houses right now, but recent evidence shows that the trend is reversing. There are several reasons for this: 1) People usually need at least a few years in their career to build enough money to buy a house. *Gasp* No way! (Extreme sarcasm notice). 2) Housing loans have loosened. 3) Housing prices have decreased. 4) Millennials are not in as much debt as believed. 5) Millennial incomes have increased.
Believe it or not at least 4 out of 5 of those reasons are true, hopefully number 2 is not. If number 2 is true then the 3 positives do not matter. All it takes are fickle people trying to make a few quick bucks to cause a crash.
Life is improving economically for my generation. I just hope that it is because of economic growth and not market inflation. Furthermore, with everything going on politically, I would not expect the same stimulus that was received in 2008. So if you are still thinking of investing I do recommend caution, there may not be a bailout. If you need advice before making the plunge into real estate, I highly recommend checking out The Jay Morrison Academy. They are a company headed by a real estate mogul, Jay Morrison, who is practically a walking, talking embodiment of the American dream. His courses can inform you on how to enter into real estate, even during uncertain times.
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How To Respond To A Housing Market Crash
There is nothing you can do to eliminate the damage done to homeowners from a housing market crash. However, there are multiple ways to minimize the damage. If you bought a house that you can afford and you put down a sufficient down payment then your mortgage rate should be manageable. Remember, aim to have your mortgage be less than 30% of your income. Have sufficient savings in case you have an emergency. Manage your spending and rewrite your budget to accommodate for the changes in income you will face.
Wait…that’s what you should do during easy times. Exactly, if you manage your money before a housing market crash, then it will not matter whether the housing bubble pops or not to you. You only need to worry if you bought a house you cannot afford. As hard as it is to believe, the amount of liability you have in real estate does not change when the real estate market crashes, only the amount of risk your lender is willing to take.
That being said, make sure you do not miss any payments during a real estate crash. While lenders tend to be lenient for three months today, that leniency will likely decrease when there is a real estate crash. When real estate is cheaper people may line up to buy new real estate and if you are not seen as profitable or reliant then your lender may foreclose to sell to the people who have the money to buy real estate. Remember, you can always just sell stocks anytime you want and accept your losses. However, with real estate you almost always have to go into debt. I highly doubt the opposite is true considering most home buyers claim that they would never be able to afford a house if the 5% option was not available.
What Should You Do During A Real Estate Crash?
During a stock market crash, stocks will be cheaper. Same goes for real estate. While many can see a real estate crash as a curse, you can see a crash as an opportunity. If you are interested in real estate, this is at least close to the time to step up. I do not blame you if you are scared, but think of what people will always need. Food, water, shelter. These are very basic needs and everyone will try to obtain them.
They may have to change to meet those needs. The most common instance is that instead of buying homes, people will try to rent. In other words real estate can still be a good investment, just not the exact same ones. However, with some volatility in the market, it may not be best to start in real estate if you must sink at a minimum thousands. Luckily, not all real estate investments require thousands up front. I will mention this in my next post.
No one can ever predict a market crash. Never listen to anyone who says they can. There are signs that the housing market can crash, but there will always be signs. The main reason people are scared of a crash is because we are in the longest bull market ever.
Yes and Australia had a bull market in housing for 55 years. What is your point? Let’s say you roll a dice and end up with twelves multiple times, the next roll you make is not any more likely to end up with two than the previous times. That is called gambler’s fallacy, it is literally a fallacy. Also, are we in the longest bull market? I’m seriously asking, NBC said last year (2018) was a bear market. Other assets have dropped too, my portfolio took a hit last year.
Markets take hits and gains. That tends to happen when people are fickle. But keep in mind, everyone remembers the 2008 Recession, while we have to remind people of the Dot-Com Bubble. Most people had no idea a crash was happening in the early 2000s. Recessions are not always as bad as 2008. In fact, I would not be surprised if we ask economic experts about when the next recession will happen and they tell us that we had one already. You can either worry about a crash that may not happen anytime soon, or who knows, maybe even never, or you can take a risk to forge your wealth.