With real estate values hitting all-time highs, it seems every real estate investor is wondering, Will the housing market crash again? While no one knows exactly what will unfold, it's helpful to look at indicators in the real estate market to try and determine where we may fall in the natural economic cycles of recovery, expansion, hyper supply, and recession.
Despite dire predictions, we're unlikely to see a housing market crash similar to that of the 2008 housing bubble. Those were different times, and the economic factors resulting in that housing crash were much different than today. Here's an overview of how to think about a potential housing market crash, the factors that affect real estate cycles, and how real estate investors can position themselves during recessionary times.
Indicators of a housing market slowdown
Recessions are inevitable whether we like it or not. The question isn't if but when. It's highly likely we're in the early stages of a recession resulting from the COVID-19 pandemic. But how can we tell if a recession will lead to a housing crash? These are some of the key indicators we should keep top of mind:
- Income, employment, and affordability: When income growth slows and unemployment rises, this puts downward pressure on housing as buyers can afford less, leading to lower home prices.
- Housing prices and supply: A housing market slowdown is usually preceded by a period of extended home price growth. The more home prices outpace inflation and incomes, the bigger the strain placed on housing markets.
- Subprime lending: Risky lending practices are what led to the 2008 housing bubble. Many call it a housing crisis, but housing was never the problem; risky credit practices by lenders were.
- Hyper supply: The cycle that precedes a recession is often characterized by increased construction, oversupply, and higher vacancy rates which eventually can contribute to over, or hyper, supply and decreased demand once completed.
Will the housing market crash again?
The key housing correction indicators listed above don't all need to be present for a real estate crash. Nor is one more important than the other as it all depends on the severity of each indicator. I really hate saying this, but it always depends.
The current real estate market in the U.S. can only be discussed in general terms, and each indicator above should be applied individually to an investor's local market. It's the reason certain cities are experiencing record high appreciation when others are struggling to find demand. That said, here are some general observations about the state of the U.S. real estate market, keeping the above factors in mind.
Incomes and debt
Household debt is at the highest level in history, surpassing even debt leading up to the Great Recession. According to the New York Federal Reserve, household debt in Q4 of 2008 sat at $12.67 trillion. In the fourth quarter of 2020, that number was $14.56 trillion. Shutdowns relating to the global pandemic resulted in a year of lackluster economic activity and a spike in job losses. The current unemployment rate on a national level is hovering at 6%.