How long until the next housing meltdown?

Real estate experts don’t seem to agree on when the next housing market crash will happen. Some say it’s right around the corner, while others say it’s more likely to happen years down the line. There are also a few who see no crash in sight at all.

The 2008 recession, mostly caused by risky lending practices, had a devastating impact on homeowners all over the country. They experienced rapidly decreasing home value estimates and prices. This resulted in many Americans owing more than they could pay and facing foreclosures.

With this in mind, it’s no surprise that everyone is keeping an eye out for the next big crash to protect themselves against financial ruin.

Many Millennials who do not currently own a home are also planning for a potential housing market crash. With rising home price estimators and home affordability down, most young homebuyers cannot afford the cost of an average home. However, their hope is to capitalize on a crash to buy cheap and sell high.

Everyone has something to gain from learning about housing market predictions. The question is, where is the market headed?

How the 2008 Housing Market Crash Was Different

Before you look for information on a future potential real estate market crash, it’s important to understand the factors that contributed to the 2008 recession and how things are different today.

Irresponsible Lending Practices

Back in 2005, mortgage lenders had very loose requirements for loan approvals. They were giving out subprime loans – more than $620 billion in total. Subprime loans are the riskiest type of loan because borrowers who take out these loans have low credit scores. As such, borrowers were more likely to default on their loans.

This set the stage for the housing market bubble, characterized by an increase in housing prices and new home construction along with a dramatic spike in house flipping.

It culminated in the 2008 recession, which left thousands with homes they could not afford and mountains of debt. And the impact of the housing market crash in 2008 lasted for years.

Recessions and the Housing Market

It’s important to note that previously, recessions had less impact on the housing market. For instance, during the dot-com bubble of 1994 to 2000, the introduction of the World Wide Web triggered a flood of investors in internet-based companies who ignored traditional metrics used to monitor the market.

When the bubble finally burst, internet-based companies took a huge hit. However, the housing market was virtually unaffected.

Following the 2008 crash, banks had to implement more careful requirements for loan approval. This considerably lowered the number of subprime loans in the U.S. and made it harder to qualify for a loan. It also made the housing market more secure. Now, more than 10 years later, the housing market has fully rebounded.

Housing Market Predictions 2020

Real estate experts and economists give conflicting reports on when the next housing market crash will happen.

Zillow, the online real estate database company, released a detailed report in 2018 discussing the next recession. The company sponsored a survey conducted by Pulsenomics and polled over 100 experts. About 50 percent of them say they expect the next recession to begin in 2020.

Some argue that a 2026 recession is more likely, as historical patterns show that a recession occurs every 18 to 25 years in the U.S.

When discussing the triggers of the housing recession, the experts settled on three main factors:

  • Trade policy. This refers to the laws regarding goods and services between countries.
  • Stock market correction. This is typically a 10 percent or more decline from a recently high stock price.
  • Geopolitical crisis. International relations have a big impact on the stock market.

While most experts agree that a recession is approaching, it is unclear how impactful it will be on the housing market.

Why Real Estate Markets Collapse

Typically, the housing market collapses because of an asset bubble, which refers to the over-inflation of a home above what it is realistically worth. Back in 2005 when the asset bubble was expanding, the average house price was 35 percent higher than the actual market value of a home. In 2017, they were at 32 percent overinflated. Some experts say that this indicates that a housing market crash is around the corner.

There are several factors that can contribute to a real estate market crash. One is higher interest rates. Although a slow increase in mortgage rates is normal, very high interest rates have historically led to a decrease in housing demand because loans become more expensive to take out.

Rising sea levels could also cause a housing market crash. Some climate change experts predict that over 150 coastal towns and cities will start experiencing regular floods in just two decades.

Currently, there are few definitive symptoms of an impending crash. However, the market moves quickly and that outlook could change just as fast.

How to Prepare in Case of a Housing Market Crash

No expert can provide a definitive answer regarding the housing market. As such, it is important for you to plan for any situation, including a housing market crash.

Whether you are a current or prospective homebuyer, one of the best things you can do is hire a financial advisor. If you are concerned about your current financial situation, a financial consultant can offer guidance and help you get on track.

These professionals specialize in financial planning and projections for clients. They help you define your financial goals, review your finances and determine the best course of action. They can also make recommendations on worthy investments and lay out any potential risks. If you are thinking of purchasing or selling a home, a financial advisor can help you evaluate your options and prepare a financial forecast.

Note that a registered investment advisor is different from a financial advisor. The former focuses on providing advice on investing. This can range anywhere from retirement funds to stocks and bonds. A financial consultant or advisor, on the other hand, provides more general advice on various aspects of your finances.

There are a few things you should look for in an independent financial advisor:

 

  • Certifications – Look for an advisor with the certified financial planner (CFP) certification. Those with this credential must pass an exam and commit to staying up to date with developments in the industry.
  • Experience – Having years of experience in a field indicates a certain level of expertise. The longer the advisor has been in the profession, the more reliable the advisor may be.
  • An hourly pay structure – Typically, a financial consultant earns money through commission, or by charging a flat or hourly rate. The commission is earned once whenever the client makes an investment in or sells a stock. As such, those who earn money through commission may not be fully unbiased in their advice. Instead, look for a financial advisor who earns money hourly or has a flat rate.

 

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