This article was originally published by Erik J. Martin | CTW FEATURES on May 30th in the print version of the Richmond Times-Dispatch
Seventeen years ago, the national real estate market hit a wall, due in large part to the overall financial crisis driven by loose lending standards and a wave of speculative buying. It took several years for the housing market to recover. Experts hope we’ve learned valuable lessons from that experience, but some are doubtful that we have.
Are we on the verge of another real estate market crash? If so, what is the proof? And how should home buyers and sellers proceed given current market conditions? A panel of trusted pros provided helpful answers, found below.
Q: What exactly is a real estate market crash, and when was the last time this happened?
Albert Lord, founder/CEO of Lexerd Capital Management: “A real estate market crash is a sudden and significant drop in home valuations and prices. It is characterized by an oversupply of housing in the market. The last crash occurred during the 2008 financial crisis, triggered by subprime lending and the collapse of mortgage-backed securities, which are complex instruments based on pools of mortgages. That crash occurred because the industry lacked strict credit standards and allowed many people with low income to borrow money and eventually default on their loans. Technically, the cause of that crash was rooted in the absence of credit checks that led to unbalanced housing demand and eventual collapse.”
Paul Stagg, associate broker with Cummings & Co. Realtors: “A crash is typically caused by a combination of economic, financial, and behavioral factors. It’s important to differentiate a crash from a market correction or slowdown. Crashes are systemic and often tied to broader financial crises.”
Q: What are some major causes of a real estate market crash?
Bruce Ailion, a Realtor and real estate attorney: “Markets are driven by supply and demand. Prices will fall when there is an oversupply with a weak demand. External factors like overbuilding in 2008 created an oversupply. High interest rates, as we see today, can also cause weakened demand.”
Stagg: “Market crashes are rarely caused by a single factor. The most common culprits include unsustainable price appreciation, loose lending standards, a sudden rise in interest rates, a spike in inventory with no corresponding demand, or an external economic shock such as mass layoffs or geopolitical instability. All of these can put downward pressure on prices.”
Q: Are there currently any signs that the housing market is expected to crash anytime soon?
Jessica Lautz, deputy chief economist and vice president of research for the National Association of Realtors: “No, there are not any signs that the real estate market will crash anytime soon. Current home price growth is being driven by the lack of housing inventory, not artificial factors in the housing market. It is currently difficult to obtain a mortgage because lending standards have been tight. Only homebuyers with the best financial footing can qualify for a mortgage nowadays.”
Lord: “Right now there are no signs of a market crash. There is robust housing demand and mortgage underwriting remains strong while inventory is low. However, persistently high mortgage rates and affordability issues are concerns to watch.”
Q: What is your prediction: Will the housing market crash anytime soon?
Stagg: “I don’t believe the market is headed toward a crash. What we are seeing is normalization. There is a return to more balanced market conditions after years of rapid appreciation. That might look like longer days on the market, more price reductions, and a shift away from aggressive bidding wars in some markets. However, these are not signs of distress. They are signs of a healthier, more sustainable market.”
Lord: “There is a small chance the housing market may have a correction of 5% to 10% in the next several years, but there are no signs of a major crash. The probability of a market correction in the coming three years is also low.”
Q: How should home sellers and buyers proceed given current market conditions?
Lautz: “If a home buyer is ready for homeownership and they feel financially ready to buy, there should be no hesitation to proceed with a home purchase.”
Lord: “Sellers should price their homes for sale realistically, especially if rates remain high. Bidding wars are not common and are concentrated in regions with historically low supply of new construction. Buyers, meanwhile, should consider not overleveraging and staying within their credit limits when considering a home purchase.”
This article was originally published on May 30th in the print version of the Richmond Times-Dispatch