What Will Cause The Housing Market To Crash?

Posted by Eric Peterson on Wednesday, February 3rd, 2021 at 2:13pm.

 

Everywhere I go people want to tell me the housing market is about to crash. Maybe the market will crash, maybe it won’t. If it’s true we are in a bubble and we will see a crash here are some of the reason we may see real estate prices pop.

Inflation and Interest Rates Going Up

There’s no doubt homebuyers are motivated by the historically low mortgage interest rates we are seeing. Many buyers are able to lock in 30-year fixed rate mortgages at 2.5% or better allowing them more buying power to stretch the price range of their home search.

Interest rates typically rise when inflation increases. With all the money being pumped into the economy it isn’t not hard to imagine we will see inflation once we see the pandemic coming to an end.

If you want to track mortgage interest rates you should follow the 10 Year Treasury Bond yields. As inflation increases, we will see the 10-year yield increase. Currently the 10-year yield is just over 1%. I have seen predictions that the 10 year may be over 1.5% by the end of the year. If that happens, we may see 30-year mortgage rates over 3%. Interest rates around 3% would still be historically low but for many buyers who have only seen rates near 2.5% that will seem like a huge increase. Some of these buyers will not be able to make as aggressive offers on homes as the higher rates will increase their monthly payments.

If we see the 10 Year yields rise dramatically towards the end of 2021 and into 2022 that could be enough to slow buyers down enough to cause a crash.

Stock Market Crash

The stock market is also at all-time highs and you could certainly make the argument that the amount of speculation in the market can cause a crash in the stock market.

What does the stock market have to do with the housing market? There are many factors. Many buyers are using stock options, particularly tech workers) for their down payment and to cover any shortage between the sales price and the appraised value. If the stock market goes down and the tech workers can’t come up with their down payment, they may hold off on buying a house.

Last March when the stock market crashed, we saw the real estate market come to a stop. Everyone was nervous. Buyers were cancelling contracts left and right and buyers who weren’t under contract put their home search on hold. That was scary! Let’s hope we don’t see that again.

More Inventory

There simply aren’t enough homes on the market for the number of buyers. The supply and demand imbalance has caused prices to skyrocket as buyers are forced to fight it out with each other over a limited supply of homes.

In most neighborhoods there may be only 1 house on the market. Buyers who want to live in the area don’t have a choice but to make an offer on that home.

As prices have gone up and some of the homes that went under contract will be reported as sold with the higher prices, how will potential home sellers react? We’ve never seen anything like this before so your guess is as good as mine. What I can tell you is the number of calls I have received and the number of sellers who we will be helping are now up 3 times over January of 2020 so that leads me to believe we will see more inventory.

What will happen if the inventory increases enough to the point buyers have 5 homes to choose from and can be choosier about which ones they want to buy? If that happens, we will see price appreciation slow down and possibly even a crash.

Job Loss

I have a friend who provides consulting services and he talks about the housing market being all about jobs. We have so many people moving here for jobs or because their current employer has given them flexibility to work from home. We are also seeing an influx of buyers who are buying today in anticipation of their employer moving to the area in 2-3 years.

If we see the job growth slow or employers changing their minds and requiring employees to work from the office that will significantly affect the housing market. Some people tell me Austin is immune to what may happen to the national or worldwide economy. Personally, I think that is wishful thinking. We may have some insulation from the overall economy but we will see any downturn nationally rippling into our local economy.

Property Taxes

When property tax assessments come out many homeowners are going to feel a lot of pain. I expect almost everyone will see their assessed value increase 10%. Investors without a Homestead Exemption are going to see huge increases in their values.

In my experience most buyers and homeowners don’t understand how their property taxes work. Buyers are purchasing based on 2020 tax values without realizing the assessed value will increase after they buy the house. We have also seen many homeowners converting their primary residence to a rental property. For most homeowners in this situation, I have talked with they will see property tax increases of $2,500-$3,000 in 2022.

Things look great right now and all the market indicators point to a strong seller’s market. If 2021 taught us anything it’s that our crystal balls are a little cloudy. Keep your eye on each of these possible factors to tell you where the market is heading and let’s hope we don’t see a housing market crash.

If you have any questions about your buying or selling a home in the current market contact us at 512-791-7473 .

 

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