Housing Market Crash

US Housing Market Crash?

Housing Market Crash Ahead?

With home prices surging ahead further again last month, it’s not hard to predict they will drop at some point. Anti crash prognosticators say there’s no chance of a housing market correction or crash.

Homes are being bid on intensely even though most potential buyers can barely afford to buy.  As interest rates race upward, Fed spending ceases, and inflation rages, why is a prediction of a housing market crash so wrong?

Consider that the Fed is raising rates with the goal of crashing the economy. Almost every rate cycle ends in a recession. The reasoning is that suppressing demand is the only way to bring down inflation, home prices, and oil prices.

And prices are raging against American wages, which means down payments might be reused for other purposes including paying for big grocery bills, heating bills, vehicle fuel and rent.  As the Dallas Fed pointed out 2 weeks ago, the price to income ratio is rocketing, and home prices are expected to rise further this summer.  However, will it take until 2023 before this market finally exhausts itself and falls with conviction.

Longtermtrends shows in their chart on the home price/median income ratio is at its highest levels ever.

Home price to median income ratio.
Screenshot courtesy of longtermtrends.net. Home price to median income ratio.

Inflation Is only one Component

In 2005, these 4 factors depicted in the graphic below preceded the housing crash.  We have the same 4 things happening right now. Surely this has to create concern even for the most optimistic observers.

4 key factors for a housing crash
Screenshot courtesy of Wikipedia.

Low Homeowner Debt Isn’t Relevant

The US real estate housing market optimists point out that homeowner debt is low and consumers are in a strong position. The unregulated factors that created the 2007 housing crisis aren’t present. And demand for homes is still very high, with many potential buyers having cash but there’s no homes to buy.

Other economists believe inflation is transitory, however rent prices for instance almost never drop and they’re rocketing right now.  With interest rates going up, how can inflation not grow?  Investment in rental property is a passion for many given rising rent yields and tax writeoffs. Even in a crash, they will likely see minimal changes in income for at least a year or more.

But with homes selling at ridiculous levels, sometimes a million over asking price, how much of an economic shock is needed to bring that overextending, speculative house of cards crashing down?   This year, the market is expected to be strong and estimates of price growth range around 16% year over year.

In this post, we look at the factors that may bring everything down in 2023.  See the 34 Major Crash Factors for the US Housing Market below.

I’m hearing more economists and finance advisors referring to 2023 in that manner. I forecasted a 2023 recession, and cited geopolitical factors. Well, Russia has delivered on that, and the Communist Chinese will be next.  They are aligning with Russia and disobeying agreed on sanctions, even as Russians soldiers commit war crimes and bomb out Ukrainian cities.

At some future date, when pessimism rules again as it does from time to time, asset prices will decline. And if valuations across all of these asset classes return even two-thirds of the way back to historical norms, total wealth losses will be on the order of $35 trillion in the U.S. alone.  If this negative wealth and  income effect is compounded by inflationary pressures from energy, food, and other shortages, we will have serious economic problems.

U.S. households own real estate worth $41 trillion. Current Census data on median household incomes and median home sale prices suggest a price to income ratio of about 5.5 after accounting for a considerable estimated increase in incomes in 2021 (last datapoint was 2020). If this ratio returns to 4.0 – which is well above any levels prior to the mid-2000s housing bubble – this would be a 27% loss of value, over $11 trillion — Jeremy Grantham GMO. Title: LET THE WILD RUMPUS BEGIN* (Approaching the End of) The First U.S. Bubble Extravaganza: Housing, Equities, Bonds, and Commodities.

In a nutshell, Grantham says, based on historic indicators, that if a recession should happen and asset values are pushed back to historic norms, it will be disastrous.  There is no doubt this is a bubble all built on Fed debt, but if demand for housing is high and Americans have wealth, how far could prices collapse?

The jobs reports have been great and wages are rising.  Won’t this unrealized potential spend result in even higher home prices in 2022, 2023, 2024?  Millennials make up the most of the market and they’re in their family formation, high income earning years.

A potential housing market crash is more likely to occur in 2023, after the 2022 midterms where the other administration gets control.  This is because the whole system becomes unstable and under contention, perhaps in a stale mate. US homeowner debt is low we might not be looking at foreclosures, but rather just a big drop in prices.

It’s difficult to know which factors would combine to launch a crashing of the housing market. It might be a matter of watching the various pieces of the puzzle move and settle into place.

A potential war action and embargo response against China and Russia seem inevitable. The bad news is piling up for for the current administration and their popularity at an all time low. With stubborn positions on US oil production, rising rates, big regulation (including the housing market), and no big stimulus in the works, the big doesn’t look good.  Doomsayers are gaining credibility.

Much of our optimism stems from the end of Covid which should rev up world markets in the late spring. Yet what’s happening in the political arena suggests all of that may not happen.  Turnaround in government policy is unlikely. The 2022 midterms are not far away and investors are always looking ahead. If the stock market doesn’t like what it sees, could the economy follow suit.

And what happens when the zeal and furor of buyers suddenly evaporate?  How will prices react?

There are 34 signals/factors to watch below.

First Time Buyers Dropping Off

In the last two years, Covid stimulus actually boosted house prices and increased demand. Now at the end of the plague, more workers will be drawn back to the cities which is already seeing more sales of condos. Prices of condos will be supported and the pressure on house prices will be eased.

During the 12 first months of the pandemic home prices rose 15% on average across the US and that was repeated in the previous 12 months.  First time buyers were hot in the mix, but they’ve started to fall off.  If interest rates rise substantially, then these buyers may face big trouble with rising mortgage payments in the coming years.  Mortgage payments in Los Angeles are up $200 a month year over year already and first timers are likely feeling the heat.  Those who have to refinance will face steep climbs, which is refinancing is down 70%.

If the Fed raises interest rates too quickly, many overleveraged homeowners, apartment landlords, and others will be in trouble. Landlords are doing better now but it will take years for them to recover their losses from the rent default pandemic era, and rent default is still high.  Could they survive another financial blow?

Screenshot courtesy of Usafacts.org.

That’s because of the work from home/office shutdown situation.  Because when residents are uprooted in any manner, they need a new living situation. That uprooting movement (from parents home or shared living spaces) causes new housing demand, which raises prices.

There is still plenty of demand from Millennials, and from those who have left their old jobs for better new jobs. Sometimes they’re in new cities, sometimes just across town.  For 2022, we have lots of demand.

34 Factors to Pay Attention To

Below are 34 major housing crash factors that could play into falling home prices in 2023.  US banks are solid, interest rates are low, demand is huge, and Americans do have money.  A drop in prices would only provide opportunities for those sitting on the sidelines due to the price.  Nevertheless, mortgage holders are fearful, and buyers are wishful.  See the 34 housing crash factors now.

There’s been talk of a housing correction for years now and it’s never happened. The home price chart shows almost no letdown even through the pandemic crisis.  If that couldn’t cripple the real estate market, what could?

Zillow’s estimates are very positive for future home prices.

Home Price Forecast
Screenshot courtesy of Zillow

34 Major Crash Factors for the US Housing Market 

  1. buyer fatigue builds to a truly precipitous point where any event could stop buying
  2. Attom Data reports homeowner profit from home sales has dropped down to what it was in 2008
  3. rising interest rates add $500 to the typical mortgage
  4. inventory in some high tax cities begins to be dumped (New York, Boston, Chicago, Los Angeles, San Francisco)
  5. tech sector plunges on falling consumer spending and trade issues with China
  6. buyer behavior becoming overzealous — bidding wars with vertical price rises in some cities
  7. ibuyers such as Zillow begin to get out of the market
  8. stock market downturn
  9. Covid infection surges and new virus variant appears (BA 2)
  10. construction picks up quickly and home glut appears in 2023
  11. oil and energy prices soar and inflation rises making buying unsavory
  12. speculators believe it’s time to fully back out of the housing market
  13. rising income and property tax hikes begin to hit middle income earners
  14. home prices ridiculously high and hit a point where they are completely unsustainable
  15. government takes radical move to “correct the situation” by instituting tough new rules
  16. China/US conflict sends stock markets crashing (Taiwan invasion/war maneuvers)
  17. Russia steps up careless behavior toward the accusatory US regime
  18. economy goes into high speed wobble inviting drastic government intervention for debt issues
  19. big rise in tax on corporations and billionaires causes wealth to flee the country
  20. stock market at peak volatility and earnings outlooks dive (investors tuned to earnings now only)
  21. bankers quickly anticipate trouble and begin tightening mortgage lending with higher rates
  22. end of moratorium leads many homeowners, landlords, cities, and renters into desperate bankruptcy situation
  23. the Fed has to raise interest rates too quickly in 2022 to cover debt/capital needs,  and given the size of home loans, a 1% increase would create defaults and panic selling
  24. countries around the world plunge into bankruptcy while their economies stall
  25. debt in the cities most likely to crash hits a critical point
  26. Republicans gain new power in 2022 elections and begin shutting down the Democrats
  27. Republicans block excessive spending (their belief that it’s frivolous and wasteful)
  28. a return to globalism which would wipe the US dramatic gains of the last 3 years
  29. “America First” dream fades accompanied by dramatic drop in purchases of China products (trade war) and high cost business environment for US companies
  30. single-family housing construction permits decline spooking home sellers
  31. homeowners who have hung on forever to sell, begin to find somewhere else to live and begin selling en masse
  32. massive student loan and personal debt defaults
  33. Trump investment tax breaks end with nothing to follow them
  34. yield curve inverts again thus scaring the financial community

It’s Not the Same as the Financial Crisis/Crash

Economic and lending circumstances today are different.  There are no mortgages to zero income zero down payment people, fewer mortgage holders are underwater, homeowners have more savings and stock market portfolios are hefty.

Technical financial factors are often spoken about by economists and brokerage companies and bankers. But in each case, the issue is dissolved when the government prints money and vaporizes the problem.  Like someone in Vegas with a credit card, the consequences are waiting for them back home later on.

A Few Housing Market Experts Expect Demand to Fall

The US administration as mentioned, could take a hard line to crash the economy, but it would cost the election.  Biden has woven such a complex web of problems, that there’s no way out.  Crushing the economy would take demand way down to ease inflation, home prices, and more. Yet inflation is likely not to fall so fast.

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Should you sell your house fast this summer? Well, you should hire a Realtor with a solid real estate marketing capability to help you get what the market will bear.  2023 poses a threat in that stimulus money may slow in that year. As things slow, speculators may give up on real estate. Construction may pick up and interest rates could rise thus easing the competition for houses for sale.

The Timeline of Housing Market

This scary looking roller-coaster timeline of market corrections and crashes indicates that when the next does happen, it could be horrific.  We have to consider what keeps the cart on the track and what will send it plunging.

Some homebuyers still haven’t recovered from their losses in the 2008 collapse (caused by defaults on consolidated mortgage-backed securities).  Their home values plunged 30% and over 9 million lost their homes. Right now, 2.7 million homes are in mortgage forbearance.

Those who wish to refinance will be looking at big hikes, and a good portion of mortgage holders are deeply indebted. And we’re not at the end of rent moratoriums, and we know most renters won’t be able to pay back the rent they owe.

Mortgage Rates. Screenshot courtesy of Freddie Mac.

Crash forecasts are revolving around interest rates and government bankruptcy, but the real threat this time is government meddling.  The US administration thinks it has control of the macroeconomic factors, and that a mountain of debt and regulation squeezes, high energy costs, and rising taxes aren’t a problem.

Commercial real estate is in severe trouble without stimulus because cities won’t be the same after the pandemic.  That debt issue isn’t going away, when companies realize workers aren’t coming back to their highly overpriced offices.  And many businesses are buried in huge debt going into the economic recovery.

The economy is rocketing (will reach 10% growth) but putting the breaks on just your dragster is ripping down the runway is not good. Some would call this a high speed wobble, where there is no control.

Once the governments get really scared (will New York City go bankrupt?) they’ll restrict mortgage qualifications, raise interest rates, which begins the process. Once everyone sees where the economy’s headed they start bailing out.

This Housing Downturn Could be a Political Event

It’s the political factors that are key this time because the economy will do well for at least 2 years until stimulus runs out. There’s little support for the economy post stimulus, and China Trade deficit has reached $70 per month.  What if the US dollar was suddenly devalued in international finance?

When house prices reach ridiculous heights as they will this summer, the government will face pressure to do something about it.  They won’t be able to build houses fast enough even if zoning laws were to allow it. The Canadian governments made moves like this 4 years ago and the housing market there collapsed.

We’ll see if the economy, stock market, and housing market will stand strong and free as the drivers of the boom are removed and buyers flee from all time price highs. The Democrats will need to be master magicians to keep the Jenga pile from tipping over. I’ve listed the full set of housing market crash factors below.

When Do Housing Bubble’s Burst?

Markets always slide right after they reach big bubbly price highs which don’t match what consumers can afford, and as supply increases and buyers and mortgage holders lose their jobs.  And buyers keep spending big with bubble cash.  An event or series of small uncontrollable financial events can cause housing purchase demand to retreat as people withdraw from big-ticket purchases.

A stock market crash could coincide with the housing event and stock prices are highly inflated, not supported by real earnings.

This could be all about hyperinflation, political mistakes, and baffling complexity.  This situation is novel, just like Covid 19, which means fear and misunderstanding will sweep in like a cold winter wind.  The fact is, most Americans cannot protect themselves. They are at the full mercy of the economic machine.

Screenshot courtesy of NAR

We might understand a stock market correction, but with the stock market forecast on a volatile but upward trend, one more Trillion dollar Federal aid package, growing American wealth, $4 to $5 trillion in the money markets, improving economy and good jobs report, and the confidence of a great nation still intact, is it even conceivable we could see a stock market crash?

Actually, the 2022 elections alone might be the catalyst for a housing and stock market bubble catastrophe.  The Democrats have called for drastic changes, based on ideology and their political preferences.  Trashing fracking, bailing out democrat states and cities, out of control stimulus spending, with renewed regulation and higher taxes, hasn’t been factored into forecasts. Democrats and many Americans simply refuse to see the danger.

Printing Money Out of Control

By printing trillions of hand out money, inflation is the result. Home prices are already rocketing and stock prices are grossly overvalued (54 x price earning ratio for Tesla stock).

The issue of money printing is only one factor.  The out of control spending now taking place, was well beyond the imagination of financial experts when they warned about spending.  The US is maxxing out its credit cards. What happens now?

Cities such as Austin, Dallas, Houston, Los Angeles, San Diego, Los Angeles, Baton Rouge, Bismarck, Anchorage, Casper, Midland, Lafayette, Bakersfield, are cities most likely to crash.  The cities of New York, Chicago, and San Francisco are in a poor financial state so floating these cities will drain state and federal funding.

Housing Market Crash Timeline

What would a timeline for a housing crash look like?   Buyers look sometimes to the past to see if there are corollaries to guide them on when housing prices might take big drop.  Stock market investors look to history timeline charts too, but with more conviction that they’re relevant.

We’re definitely in a bubble, but the inflation effect is far from over. Given stimulus money and a recovery, we might not see a drop until major political conflict, change, or interest rates are pushed up too fast. That could happen if the US government can’t pay its debts.

The debt crisis is a major crash factor that few are talking. Experts have said however that the US could just keep spending forever. No one has explained exactly when or how the debt crisis will manifest itself.

Now in 2022, amidst high inflation, persistent housing shortages, a stretched out recovery, and Americans having lots of cash to spend, we have to agree with Zillow and Redfin’s general estimates of 10% to 16% price rises.  The bidding wars will continue, but buyers will try to get more creative.

The secondary mortgage market might try to come up with new solutions for borrowers, but without housing stock, there’s not much anyone can do. Home prices will rise.  Construction numbers aren’t good and with the new Covid variant surging, builders are going to be apprehensive about big development projects.  The government would have to guarantee builder’s investments and losses.

Which are the cities most likely for a housing crash? Which cities should you buy property in 2019?

How Vulnerable is Your City?

Yet, investors and homebuyers should still be concerned about a housing bubble in their cities. Not all states have recovered from the last recession, nor benefited from any Obama era Federal government policies.

In late 2021, could the Fed ratchet up interest rates to pay for all the stimulus?  In fact, almost every recession, housing downturn, or major catastrophe has been aided by fast rising interest rates. These rate spikes kill off business and put extreme pressures on mortgage holders. Markets collapse quickly then interest rates are quickly lowered.

This transition to a US centered economy over many many years, still puts the country into a vulnerable period of uncertainty and GDP risk.  Will companies build factories here or instead hold off and hope for a Trump loss in 2020?

Unfortunately, “soft landings” after rate hike cycles are as rare as unicorns and virtually all modern rate hike cycles have resulted in a recession, financial, or banking crisis. There is no reason to believe that this time will be any different — Forbes report.

Crashes Historically Follow Price Bubbles

Markets fail when you least expect them to. After reading this post, you’ll see how easy it could happen from California to Texas and New York to Chicago. What will stop the dominoes from falling?

Don’t we learn from history?” Perhaps history can only tell us whether the housing market 2020 is headed on a downward path, but can’t really say when or how it will happen, which cities might crash.

Zillow polled 100 economic experts about the economy and they believed a recession was coming in 2020. It would have happened if the Covid pandemic hadn’t occurred.  Have we seen the end of stimulus inflation?  More stimulus would create more inflation and trillions more are already stuffed into the money supply.  That money still in stocks, crypto, and bank accounts could start chasing too few houses in 2022 leading to an event in 2023.

See the local metro markets: ChicagoSan Antonio, San Francisco, PhiladelphiaSan DiegoLos Angeles, Miami, Houston, New York, Boston and for all of Florida.

Neil Kashkari talks extensively about false prophets. He says market bubbles and crashes are very complex and the source is often completely unexpected. Could the oil sheiks take the US economy down again? Could China do it? Is the $20 Trillion debt a threat? Or is just the end of a bull run in the stock market?

However, in those cases where debt is fueling the asset value increase, a correction could trigger financial instability, because banks might take huge losses and potentially fail.” — Neil Kashkari.

Check the stats and forecasts for the Denver housing market, Chicago housing market, Boston housing market, San Francisco housing market, Philadelphia housing market, and New York housing market.

Top 10 Cities Most Likely to Experience a Housing Crash

From a report in AOL.com here are the top ten US Cities most likely to experience a deep falling:

  1. Portland, Oregon
  2. Charleston, SC
  3. Buffalo, NY
  4. Fresno, CA
  5. Los Angeles, CA
  6. Dallas, TX
  7. Salt Lake City, UT
  8. Austin, TX
  9. San Jose, CA
  10. San Francisco, CA

Best Cities to Invest in Real Estate

Are you looking for the best cities to invest in real estate or to avoid those metros most likely to crash? The best cities to buy rental properties gives you a peak at the potential of rental property investment.

Is this the right year to buy a rental income property?   Should you sell your house, and when is the best time to sell it?

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See more forecasts on the real estate housing market, and the latest home prices and sales trends for numerous major metros in California including San Diego, Los Angeles, San Francisco, and Sacramento.  See stats on other cities, including Denver, Dallas, New York, Boston, Atlanta and in the Florida housing market in Miami and Tampa.

Rising mortgage rates, inflation, reduced housing supply and high home prices threaten the markets, it appears 2002’s real estate scene will stay strong. Realtors may want to build their presence this year as house prices decline in 2023. Lower prices will bring plenty of homes onto the housing market and boost your opportunities.

Stock Market Crash | Housing Market Crash | Crash 2023 | California Housing Crash