Is the Housing Market Crashing?

Rising inflation and higher interest rates have seemed to cool off the red-hot housing market…but what’s next? Could we be on the precipice of a market crash akin to that of 2008?

Is the housing market crashing in 2022?

A typical real estate cycle has four phases: expansion, hypersupply, recession, and recovery. Hypersupply is when construction companies build more houses or units than what is needed to meet demand, which is exactly what happened before the Great Recession of 2008. However, as a country we are currently in a housing shortage, and a severe one at that.

Rather than entering the hypersupply phase of the housing market, we are entering a ‘demand exhaustion’ phase, where buyers are essentially bought out of the housing market by high prices and rising interest rates. We’re seeing a decline in bidding wars and decreased price growth. Most experts would say that the housing market is in a recession, with the rest of the economy soon to follow.

We are looking at two different possible outcomes: a correction, or a crash. A correction means gradual decreases in prices to a more sustainable level, while a crash means rapid declines caused by panic from homeowners and investors. Fear not! A total crash isn’t very likely, as builders have NOT overbuilt, and lenders are incredibly strict with their standards, a very different story than the 2008 housing market crash.

What were the top reasons for the housing market crash in 2008?

There are several mounting reasons why the housing market crashed. Adjustable rate mortgages can take partial blame. While rates may have started low for borrowers, they changed, making it harder for borrowers to keep up with their mortgage payments.

Subprime loans were the main culprit for the 2008 market crash. Lenders allowed for people with poor credit and high risk of default to take mortgages. Investors with ample liquid capital wanted to opt for riskier investment opportunities, turning to mortgages. There was an increased demand for mortgages due to low interest rates, making a demand for risky home loans. Read more here.

What caused the housing crisis 2022?

Interest rates in 2022 have risen significantly, resulting in an almost immediate drop in housing demand. More rate hikes are expected to happen, so housing demand will likely continue to drop. These efforts made by the fed to try and combat inflation and rebalance the housing market may further pinch the market, but not likely to the point of a crash.

There are some concerns with an impending recession, which may push more homeowners to sell their properties, but this increase of supply could result in settling of home prices. A recession may also slow the growth of home prices. Keep in mind that the stark rise in home prices over the pandemic were spurred by demand and low interest rates.