With U.S. home prices appreciating rapidly and the memory of the great recession not that distant, it’s natural to ask, when will the housing market crash next?
According to a recent report by Zillow, more than half of U.S. homes are valued more than their peaks before the Great Recession. The median home sales price in the U.S. in June 2009 was $214,700 and in June 2018 was $302,100. That’s over a 40% increase nationwide per U.S. Census data. Can we expect home values to continue in this upward trajectory or will there be a market correction?
When thinking about what causes a housing market crash, there are two factors that can be indicators of the next crash: rising interest rates and an increase in loan default rates.
Rising Interest Rates
Historically, real estate interest rates tend to hit their highest after real estate values peak. Mortage rates have slowly inched their way up this year. Recent Freddie Mac data shows the rate for a 30-year fixed rate mortgage is 4.54%. In fact, the rates for home loans are at their highest levels since 2011.
The chart below provides a clear visual of mortgage rates in the U.S. over the past 10 years.
Tracking interest rates can help you understand when will the housing market crash next. We have seen interest rates set extremely low for an unprecedented amount of time. Now that rates are finally rising, we must be aware of how quickly rates rise and by how much.
What would be considered an interest rate peak in today’s market? It’s hard to tell. There isn’t a magic number to look for. Interest rates reached their peak at 6.70% in July 2007, which was right after real estate values peaked in 2006 according to FreddieMac. Additionally, after real estate values peaked in 1979, interest rates hit their highest point of 18.16%.
So, a trend to follow would be interest rates as compared to home prices. If home prices begin to fall a bit and interest rates continue to climb, this may indicate an impending market correction – or a full-on crash.
Increase in Loan Default Rates
Another key indicator of an impending housing crash is the rate that homeowners are defaulting on their loans. In 2008 as the Great Recession was underway, foreclosures were up a record 81%. An astonishing 861,664 families lost their homes to foreclosures in 2008. One in every 54 households received a foreclosure notice in 2008.
As loan defaults rise, more homes go on the market, thus increasing supply. As supply rises, prices tend to fall. This, of course, is the fundamental economic principle of supply and demand.
While foreclosures are dropping to 12-year lows in 2017, we may begin to feel comfortable. This is a good sign that we aren’t in for a housing crash at the moment. However, there is another loan bubble that can affect the housing market: student loans.
Student loan debt totals a whopping $1.48 trillion in the U.S. An estimated 4.7 million federal loan borrowers are in default already. In 2017, we saw student loan defaults rise to 11.5%.
While some homeowners may be defaulting on student loans, a more troubling trend is the fact that student loans are preventing many from buying homes at all. Current student loans are burdening younger Americans so much that a recent study found that student loan debt delays homeownership by seven years. With fewer buyers looking for homes and home prices hitting all-time highs, home sellers are going to have a harder time finding buyers. As homes sit on the market longer, price reductions are needed.
So, when will the housing market crash next?
It’s not a question of if the housing market will crash, it’s a matter of when. However, nobody really knows when it will.
There are so too variables to predict. The two indicators above are good things to track, but larger world events like war or extreme political actions can trigger a housing crash.
The rising student loan debt in this country is a troubling trend as greedy universities milk their students for more money leaving them burdened with nearly $40,000 in debt (on average) at graduation. The student loan bubble may play a part in the next housing crash.
What do you think? When will the housing market crash next in your opinion? Share your thoughts below.