- Anyone who claims to know exactly when the real estate bubble will burst is not being honest.
- The theory of supply and demand teaches us that once prices are too high, buyers will exit the market.
Now is a great time to be a home seller but a relatively rough time to be a buyer.
At this point, it's impossible to check the news without reading that the housing market is about to crash. Oh wait, the next news story says it's not likely to happen in 2022. The truth is this: No one knows for certain what's going to happen next in the housing market. The best we can do is look for signs.
A crash or a popping bubble?
Many people believe we are currently in a real estate bubble. One might define a real estate bubble as a period during which the following is true:
- There is greater demand for homes than the supply of homes on the market. (Check.)
- There is an unusual spike in the price of homes. (Check.)
- More investors than average enter the market, hoping to flip houses and make a quick profit. (Check.)
- Buyers are willing to waive contingencies designed to protect their financial interests, like home inspections and appraisals. (Check.)
As of this writing, home sellers are still in the driver's seat in most markets. Still, when you notice the following four things happening regularly, it's safe to believe a housing correction is not far behind.
1. Home prices soften
Granted, home prices continue to soar in most markets, but there are definite signs of softening in some areas. For example, home prices in Peoria, Illinois, are down 1.8%, and in Gulfport, Mississippi, they're down nearly 5%. Beaumont, Texas, has experienced an overall drop of around 1.4%, while Kansas City, Missouri, prices are down 0.7%.
It's not much at the moment, but it's a start and worth keeping an eye on.
2. Inventory picks up
The true culprit when it comes to the current state of housing in the U.S. can be traced back to supply and demand. Supply and demand boils down to this: The less there is of something that consumers want, the more they're willing to pay for it. In the case of homes, the more they want it, the larger mortgage they're willing to take out.
Back in 2020, when the U.S. began sheltering in place due to the pandemic, the initial school of thought was that sheltering would prevent people from buying homes. Instead, the opposite occurred. The housing market boomed as millennial buyers took advantage of historically low interest rates to purchase their first homes. In fact, so many people wanted to buy property that the relatively few on the market were snapped up amid bidding wars and shockingly high prices.
As builders complete more new homes and the number of people selling their property increases, the uptick in supply can signal lower prices on the horizon. Once buyers are no longer caught up in bidding wars, cooler heads (and prices) will prevail.
3. Confidence declines
A February Fannie Mae survey found that 70% of people consider now a bad time to buy a house. There's some old-fashioned reasoning behind this result. Only 43% of respondents expect home prices to increase over the next 12 months, while 58% expect mortgage rates to go up. Plus, 17% of those surveyed say they're concerned about losing their jobs. People who are concerned about the future are less likely to get into a bidding war over a house.
4. Rise in interest rates
Mortgage rates recently topped 4%. While 4% is still remarkably low, rates are moving up. Back to the theory of supply and demand, eventually, high prices plus higher interest rates will reach a point that causes people to pull out of the market, softening home values.
Given the number of experts claiming to know precisely when the housing bubble will burst, the old adage "even a blind squirrel finds a nut once in a while" is fitting. After all, by sheer chance, some of them are bound to be right.
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