The US real estate market is always fluctuating, going up or down depending on a wide range of factors. The lowest point is a real estate market crash, as was last witnessed during the 2008 housing crisis. However, such a crash should not catch the world by surprise. In fact, the 2008 real estate market crash was accurately predicted:
“The next major bust, 18 years after the 1990 downturn, will be around 2008,
if there is no major interruption such as a global war” – Fred E. Foldvary (1997)
If the cycle repeats itself, then we could see another real estate crash around 2026. Real estate generally goes through 4 distinct cycles; recovery, expansion, hyper supply, and recession:
- Recovery – This stage is characterized by high unemployment, low consumption, and little demand for real estate investment. There is little or no construction or home sales happening in the recovery phase. Still, most of these indicators will be experiencing upward trends, pointing to a housing market recovery.
- Expansion – The economy starts growing and more jobs are created. There is more demand for space and rental rates are on the rise. At the peak of the expansion phase, demand and supply are in equilibrium.
- Hyper supply – At this phase, supply begins to exceed demand. With the hyper supply of rental properties, the vacancy rates also increase.
- Recession – There is still an oversupply of properties accompanied by high vacancy rates. Property owners are often forced to lower their rents and offer concessions in order to attract and retain their tenants.
Learn More: What Are the 4 Real Estate Cycles?
So, what could cause a real estate market crash? Here are some of the real estate market crash indicators to look out for:
Listed Homes for Sale with High ‘Days on Market’
As the name suggests, days on market (DOM) refers to the number of days a property has been available for sale, beginning with the date it was first listed in the multiple listing service (MLS). Property buyers look at the days on market to get an idea of how other people are reacting to the home. The longer a property has been on the market, the less demand there will be for it. Buyers might begin thinking that the seller is not motivated to sell, or that there is something wrong with the property.
While it is not strange for homes to remain on the market for a few weeks, you should be worried when this turns into many months. If most properties listed are taking too long to sell, this is one factor that could contribute to a real estate market crash.
Related: How Average Days on Market Should Affect Your Investment Decision
Increasing Housing Inventory Levels
‘Months of supply’ is a term in the real estate industry that refers to the number of months it would take for the homes currently available on the market to sell. This is established by considering the average number of properties listed each month versus the number of homes that are sold each month.
For instance, if a neighborhood has an average of 40 properties listed each month – and an average of 8 properties sell each month – the market has 5 months of supply or a 5 month supply of housing inventory. According to real estate authorities, markets with less than 6 months supply are considered seller’s markets since the number of buyers exceeds the homes available for sale.
Therefore, when inventory in the US housing market starts exceeding 6 months of supply, it is a sign of a real estate bubble.
An Increased Drop in Real Estate Prices
Tumbling home prices in the real estate market is another factor that could lead to a housing crisis. At the expansion phase, the price of real estate is out of the reach of many real estate investors and homebuyers. As a result, demand for homes eventually drops. When this happens, property owners are likely to lower their prices in order to attract buyers.
If only a few sellers reduce their prices, then there is no cause for alarm. But when most sellers in a market are forced to lower their listing prices, then there is a high chance of a real estate market crash.
High Interest Rates
When mortgage rates are high, loans become more costly. Home construction slows down, thus reducing the supply of properties. A high interest rate also slows down lending. If this is not checked, it will eventually result in a real estate market crash.
High interest rate was one of the main reasons behind the housing crisis in 2008. Before that, mortgage lenders were giving out a lot of adjustable-rate mortgages and interest-only loans. Between 2004 and 2006, the Federal Reserve increased interest rates too fast. Borrowers could not afford to make the payments and default rates rose. Many homes went into foreclosure and home values fell drastically.
Related: Investment Property Mortgage Rates in 2020: All You Need to Know
Government Policy Changes
There are many kinds of government regulations that control the real estate industry. The regulations could be on a federal level or state level. Here are some examples of housing regulations:
- Zoning laws – Are vacation rentals permitted? How many properties can be constructed per acre? Zoning laws determine how land may be used.
- Consumer protection laws – Consumer protection laws regulate how people can borrow money to buy homes. In addition, these laws protect potential homeowners and renters from discrimination based on sex, color, disability, national origin, and race.
- Rent control – Some local governments limit the amount by which property owners can increase rent. Though such controls are designed to protect tenants, they reduce the return on investment for landlords. As a result, people are discouraged from buying rental properties.
Government policies affect the location, quality, quantity, and price of income property all over the US housing market. If the policies become increasingly onerous and complex, this could contribute to a real estate market crash.
With these real estate market trends, the next housing crisis should not catch you flat-footed. Be aware of the real estate cycles so you can prepare for the risks and take advantage of the opportunities for buying investment property or selling investment property.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.