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Is a Housing Market Crash Possible?

Crash or boom? This is the trending question of the year. As we have witnessed over the past year, anything is possible. Who knew we’d be hit hard by a pandemic and experience unprecedented record-breaking numbers in the housing market and other economic sectors?

This article looks at the current state of the housing market and will present some predictions for 2022 and beyond. It’s important to keep an open mind about the latter as it’s really hard to say what’s going to happen in the next five years. In general, there is an optimistic outlook for the housing market in the coming months and even years.

Housing Market Key Stats and Trends in 2021

Housing Prices

  • According to the Federal Housing Finance Agency House Price Index or FHFA HPI, house prices were up 12.6% from the first quarter of 2020 to the first quarter of 2021
  • Lack of inventory has led to falling affordability of homes being sold
  • Between Q1 of 2020 and Q1 of 2021, house prices increased in all 50 states. Idaho, Utah, Arizona, New Hampshire and Connecticut have had the highest appreciation rates

Housing Demand vis-à-vis Low Inventory

  • Millennials and first-time home buyers are primarily the ones driving the market in 2021
  • The shift to remote work due to the pandemic is another factor that led to the surge in demand. Increased interest in buying homes in the suburban areas has been observed.
  • There is a huge imbalance between the demand and the number of homes being sold or constructed
  • Although it is gradually starting to increase, the inventory of newly listed homes as well as active listings remains relatively low compared to pre-pandemic periods. As of May of this year, there was a 43.1% drop in the national inventory over the past year.

Mortgage Rates

  • The record-low mortgage rates made home buying very achievable, contributing further to the rise in demand
  • According to the results of the Primary Mortgage Market Survey conducted by Freddie Mac as of July 8, 2021, a 30-year fixed-rate mortgage averaged 2.9. A 15-year fixed-rate mortgage on the other hand, averaged 2.2% and a 5-year ARM averaged at 2.52%

Predictions for 2022 and Beyond

Experts have observed that more homeowners are listing their properties for sale and construction of new homes is picking up. Low mortgage rates are expected to persist in the near term. Recovery of the US and global economy is also expected to positively impact the housing market.

Home prices are forecasted to continue appreciating over the next five years according to the results of the Q2 2021 Home Expectations Survey. The panel of experts who participated in the survey are expecting high appreciation rates until next year and start leveling off in 2023.

Because of the projected continued growth in home prices, there was a surge in home equity. This equates to a substantial growth in household wealth. This means that homeowners can take advantage of the growing equity to sell their current property and move to a new one.

Corelogic tracked the year over year increase in equity and based on their Homeowner Equity Insights Report, the average annual gain is $33,400 per borrower over the past 12 months. The graph below, created by Keeping Current Matters, shows the potential gain over the next five years if a homeowner were to purchase a property worth $350,000 in January 2021.

The bottom line is that a market crash is not expected to happen anytime soon. The forecast over the next five years is optimistic and for existing homeowners, there is no better time to consider selling than now.

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