Right now, the housing market is red-hot. Home values are up across the country, and existing homeowners are sitting on record levels of equity. But some people are worried that the housing market is about to take a serious turn for the worse. For one thing, mortgage rates have been on the rise since the start of the year, and they've climbed at a rapid clip. If that continues, buyer demand could start to wane, leading to a dip in home prices.
Furthermore, some financial experts are already sounding warning bells about an impending recession. Whether their predictions are accurate is up for debate. But a lot of people are worried about a prolonged economic downturn. And if that were to occur, it, too, could create a scenario where homebuyer demand drops, leading to a significant dip in home prices.
But while it's easy to see why some people may be worried about a housing market crash, I don't think there's reason to stress. Here's why.
Low housing inventory to the rescue
Any time you have a scenario where the supply of an available commodity exceeds demand, the value of that commodity can fall. Many people are worried that rising mortgage rates and economic turmoil will lead to a significant dip in buyer demand in the not-so-distant future. But there's one thing the housing market has going for it right now: inventory, or, more specifically, a lack thereof.
As of the end of March, there was a mere two-monthly supply of available homes on the market, according to the National Association of Realtors. For context, a more normal housing market would have a four- to six-month supply of available homes.
Because housing inventory is so low, we're unlikely to land in a situation where the supply of properties greatly exceeds demand. And in the absence of that, we're unlikely to see home prices plunge in the near term.
That said, if buyer demand does wane due to these factors, home prices might start to fall from their currently inflated levels. But that wouldn't constitute a housing market crash -- it would merely be an overdue correction.
How to gear up for falling home values
Today's home prices just aren't sustainable. And at some point, we should expect property values to start creeping down to more moderate levels.
If you're a current homeowner, now may be a good time to take out a HELOC (home equity line of credit) if you want the option of tapping your higher level of equity while you still have it. Meanwhile, if you're thinking of downsizing your home, now's a good time to go that route -- because chances are, you'll walk away with a nice profit on your home based on current prices.
If you're a real estate investor with an underperforming income property or one you want to unload to free up cash for other ventures, now may be a good time to sell -- while inventory is low and demand is still strong.
But all told, there's no need to panic about an impending housing market crash. While home values are likely to drop over time, they may end up doing so at a slow and steady pace, and only to what ends up being a fairly moderate degree.