Probability Of A US Housing Crash: Assessing The Likelihood

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Probability Of A US Housing Crash: Assessing The Likelihood

Jun 8, 2023 | News | 0 comments

Amid the volatile and uncertain market, predicting a housing crash has become a popular trend. Those who hold a contrary view have faced ridicule, particularly from those lacking understanding of market intricacies.

Rebecca Richardson, from UMortgage, boldly forecasted a year ago that a housing crash would not occur. Now, she sarcastically remarks on the strong opinions she received from skeptics. One year later, despite challenging market forces, she points to mounting evidence suggesting that the feared scenario is unlikely to materialize. While factors like recession, inflation, and stagflation do impact American households, Richardson emphasizes that they do not necessarily spell doom for the housing market.

Richardson supports her argument against a housing market crash by referencing the National Home Price Index, which tracks the value of the US residential housing market. She notes that historically, home values have continued to increase during most recessions, except for the 2008 housing bubble burst caused by subprime mortgages and crashing home values. While Richardson acknowledges the possibility of corrections and localized declines in some areas, she emphasizes that it does not indicate an imminent housing crash.

Many economists agree with her perspective, citing reasons such as a drop in foreclosures, limited housing supply, low inventory, a growing number of buyers, and stricter lending standards. While some economists suggest the potential for a bubble due to psychological factors and economic conditions like shifts in income, credit costs, and supply disruptions, the general consensus is that the current housing market does not resemble a bubble.

The economists at the Federal Reserve Bank of Dallas caution that real house prices can deviate from market fundamentals when there is a widespread belief that the current robust price increases will continue. This belief, fueled by a fear of missing out, can drive up prices and create expectations of further gains, leading to exponential or explosive growth detached from underlying factors. Such expectations-driven appreciation, also known as exuberance, can result in the misallocation of resources, distorted investments, bankruptcies, and broader macroeconomic impacts.

Monitoring the housing market in real time helps investors and policymakers address these misalignments before they escalate and cause economic turmoil. Therefore, it is important not to make investment decisions based on fear. Rebecca Richardson echoes this sentiment, advising individuals to work with knowledgeable lenders and realtors who can provide informed guidance rather than acting out of fear.