3 Reasons the Market Could Crash but Won’t

Posted by Michael Perna on Wednesday, June 2nd, 2021 at 8:30am.

Here’s why there’s no reason to worry about an impending market crash.

  

Will the Real Estate Market Crash?

I have had a ton of questions along these lines in recent weeks, so I wanted to take a few minutes to take a good look at 3 reasons that it could, and 3 reasons why I don't foresee this happening.

Google has had a significant spike in the number of searches for "When will the real estate market crash," with a 2,400% increase over the last 30 days. This is definitely a topic on a lot of people's minds. There has also been a 350% increase in searches for "How much above asking price should I bid on a home". Most people seem to be very cognizant of the current real estate market, but I believe there is a certain amount of fear of the unknown involved as well. Here is some extra information that may help explain where we are and what to expect as we move through the remainder of 2021 and into 2022.

The first reason the market could crash is that Interest Rates could rise. This is the single greatest impact on the real estate market that we could see as an outside force. Simply put - Higher interest rates make loans more expensive for consumers. They slow home building along with decreasing the supply of inventory on the market. It also slows lending, which cuts back on demand. Quickly rising rates can have a crushing result on the real estate market, but I believe we have learned some lessons over the past 30+ years which will prevent this from happening.

The reason I don't see this being an issue is that the Fed has committed to low interest rates for the foreseeable future. From the last great crash until now, we have experienced a slow and steady incremental increase in rates, which will not create a catastrophe. We have also been living through the greatest economic expansion in US history. Rising interest rates can help throttle the gas and simultaneously fuel an economy. It's when raised too quickly  that they could potentially tank the market and the economy as a whole, which I don't believe anyone wants to see happen.

The second reason the market could crash is the Inverted Yield Curve. Typically speaking, a longer term bond should be paying a higher interest rate back to the bondholder. A shorter term bond would typically yield a lower interest rate and make less money. When you see a higher return on a short term bond than on a long term bond, this is an Inverted Yield Curve. This is usually the harbinger of disaster. In fact, the last 7 times we've seen an inverted yield curve of bond rates it directly preceded a depression or recession. We saw this happen briefly 2 times in 2020. However, when looking at other events currently taking place in the world (Coronavirus, the impact of COVID on the economy, unemployment rates, etc) I believe this is a fluke.

Throughout all of 2021 we have been seeing the yield curve move expanding in the right direction. In other words what longer term treasury bonds pay have been steadily increasing, which is the sign of a healthy economy and a strong indicator we're on a recovery, not an economic disaster. 

The Third reason the real estate market could crash, is that Lending standards on mortgages have loosened again a bit over the past few years. However with the current credit requirements, we are still nowhere near the loans we had seen back between 2003-2007. The No Income No Asset, One Day Out of Bankruptcy and other loans that fall under "liar loan" where nearly anyone could qualify (even those with no credit) have not come back.  So yes, lending standards have decreased their credit qualifications over the last few years, even coming out of this last economic threat, but only slightly and not to the point where it could become an issue of concern. 

My final thoughts...

At the end of the day, the most impactful and strongest determiner regarding the price of any product or service is Supply & Demand. We are still very much in a seller's market with the low inventory and the influx of buyers competing for homes. With the dramatic offset of the current balance, we are looking at another 5-10 years before we see the market balance out or shift to becoming a buyer's market. This is for a couple of reasons.

One, Demand for homes is WAY up. We are seeing the millennial generation entering the buyers market in numbers never seen before. According to the National Association of Realtors, 37% of the buyers in the current market are millennials. With the low interest rates, working from home and the fact that it is now typically cheaper to purchase a home than to rent, millennials have seized the opportunity to move into the real estate market. Also, Gen-Xers have largely become a generation who is working from home - homes that they like, but don't necessarily love. With the current market conditions and being able to afford more now for the same amount, they are also looking to take advantage of this being the best time to buy a new home.

Conversely supply is WAY down. The Boomer generation has slowed down significantly on their moving. For the past several decades, we have typically seen homeowners living in a home for an average of 7 years before selling. We are now seeing that number increase to 11-12+ years (nearly a 50% increase). While every one person waiting to move is a small decrease to the supply of homes, millions of people choosing to do so is having a deafening impact. 

Another important factor in the shortage of homes in today's market is the production of new homes being built. Over the past 40 years we have seen an average of over 25 Million homes being built each decade. Between 2010-2019 however, only 5.8 new homes were constructed. This is an automatic 20 Million additional homes missing from the current market.

I do believe that US ingenuity CAN ramp up home building from about 1 million homes per year to 2 million homes (pending lumber prices, the status of contractors continuing to be overworked, etc), but we are likely another 5-10 years away from reaching normal production levels. Additionally, we are probably another 5 years on top of that from recouping the lost homes that are currently not being built.

To recap, yes, there are several factors that could cause the real estate market to crash. But, the truth is that it would take at least 2 of these factors to happen simultaneously to make this a reality. With the current situation in the market, the current economy we are experiencing and the various factors being anticipated for the foreseeable future, a crash is not currently something to be concerned with.

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