🏡 3 Metrics That Will Help You Predict The Next Housing Market Crash 📉
Will home prices fall in 2022?
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When will the US housing market crash?
Some people are predicting a crash in 2022. Others say that the housing market is in great shape.
In this post, we look at 3 metrics that you can use to predict the next housing recession.
1. High Default Rates
Why? High defaults lead to an over-supply of inventory.
In the lead-up to 2008’s Great Recession, lots of homeowners defaulted on their mortgages. Banks were forced to put these homes up for sale. This increased the supply of homes, and pushed prices down.
However, we’re unlikely to see high default rates in 2022
At the height of the Great Recession, 5% of total mortgages were seriously delinquent. Right now, only 0.5% of mortgages are in the same category.
Very few homeowners are at risk of default.
Why has there been such a huge reduction in defaults?
Lenders have learnt their lessons from the 2008 recession. Banks and other financial institutions have tightened their underwriting practices since then.
Lending standards have been really tight for the last 10 years, and are unlikely to change anytime soon.
To sum up:
High defaults can lead to a crash in home prices
The likelihood of high defaults in the next few months is very low
2. High For-Sale Inventory
Home prices are a factor of demand and supply. If too many homes come up for sale, the housing market could be in trouble.
What is the likelihood of a housing crash due to an over-supply of inventory in 2022?
Almost none. There just aren’t enough homes available for sale!
Housing inventory is very low, especially when compared to long-term historical trends. (We explained why in a previous edition of this newsletter.)
Economists at Freddie Mac believe that the US housing market faces a supply shortage of 3.8 million homes. NAR researchers go further - they think the housing market is under-supplied by 5.5 million!
Will the end of forbearance increase housing inventory?
The federal forbearance program had allowed homeowners to pause their mortgage payments, because of the economic downturn caused by Covid-19. This program ended on September 30, and 1.5 million homeowners are still behind on their loans. Will they be forced to sell their properties?
Fortune Magazine asked us the same question back in July. Our answer - not really. And here’s the main reason why: Home Equity.
Home Equity is the difference between what your home is currently worth, and the amount you owe on your mortgage. Home prices have risen 19.7% over the last 12 months. Currently, most homeowners have enough equity in their homes to work out a solution with their lender. This will help them avoid defaulting on their mortgage.
However, some markets are at high risk!
Boise City, Austin and metro areas in Florida are issuing permits at a furious pace! These markets could see home prices cool down or even decline in the next few years, if demand does not increase at the same rate.
3. Lack of Demand
Low demand is as big of a risk to the housing market, as high supply.
If demand for homes goes down, then sellers will be forced to reduce prices in order to force a sale, which can lead to a housing crash.
How was housing demand changed?
Housing demand has been increasing for the last 10 years. Sales have increased by 200K/month from 2011 to 2021.
What about future demand for homes?
There is likely to be strong demand for homes in the future.
Millennials and Gen Zs together make up 50% of the population in the United States.
And researchers at Urban Institute predict that they will increase their homeownership rate from 46% in 2020 to 64% in 2040.
In summary - the likelihood of a housing crash in 2022 is very low in most markets.
However, markets like Boise City & Austin are risky because of potential over-supply from a flood of construction.
Home.LLC works with WSJ for a Story on Idaho’s Housing Market
Idaho’s housing market is on fire! Home sales have exploded over the past two years, and home prices have grown twice as fast as in the rest of the US.
These are some of the insights Home.LLC helped Nancy Keates of The Wall Street Journal uncover in her fantastic feature on Idaho’s ski towns. Give it a read here.
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