Is real estate going to crash in 2021? Or is it going to boom? As we near the end of another year, amid the raging pandemic, a lot of confusing questions are bearing upon us.
Like all parts of the world, the COVID-19 pandemic has had a huge impact on the US economy, leaving us questioning if the real estate market would manage to survive in 2021 and beyond. The way the pandemic created a stir in the economy has left many real estate investors skeptical of what the future looks like.
Since the dawn of the pandemic in 2020, affecting livelihoods, there has been a significant decrease in homebuyers investing in properties. In 2021, homebuyers expect home prices to come down.
Experts are on the lookout for any possible signs indicating the beginning of a housing market crash. These signs will likely help us to determine what the future of the housing market looks like.
If we look at the past market activities, previous scenarios of recessions, it is evident that certain patterns of market activities have ultimately led to a crash. These could include anything from housing bubble bursts, risky mortgages and insurance, increased foreclosure rates, and others leading to an inflated market. If there is just one or two of these signs, there is no futuristic risk implied. However, a rising number of red flags could imply possible signs of a market crash.
Are you looking for any emerging patterns of a market crash in Nebraska? Reach out to our team. We have some of the best real estate agents in Nebraska at your disposal.
If you have a fundamental understanding of these signs and the factors that drive the market growth or decline, you’d be able to analyze patterns and prepare for what the future holds.
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Interest rates
Look out for possible signs of rising interest rates. These interest rates have a major impact on leading to a crash in the housing market. When the interest rates are higher, it would become challenging to buy a home, which would, in turn, decrease the demand for housing.
Of course, interest rates do rise over time – a gradually rising interest rate is always manageable, but the one that spikes up rapidly would crash the housing market.
However, in the current market, no rapidly rising interest rates are observed. So, this should be the least of our worries about what could destabilize the housing market.
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Bubble
Next, we look for signs of bubble – which would mean the market’s growth is all set to bust and crash. When the price of real estate goes up spontaneously, it generates a housing bubble. Signs of low-interest rates, low supply, and high demand are key factors that play a prominent role in creating a bubble.
Over time, gradually, the demand for housing comes down, increasing the supply. These two factors result in a price decline, bursting the bubble. A broken bubble means overvalued homes (resulting from buyers’ inflated demands) will experience a decline in their value. This would ultimately make it challenging for homeowners to afford their mortgages – which implies a possible market crash.
When risky mortgages increase, undoubtedly, we can expect to see a market crash happening soon. There might be homeowners who are unable to afford mortgages. These homeowners get their mortgages approved when the lenders offer relaxations on their lending standards. These are the high-risk loans that are responsible for the artificial inflation of home values – resulting in a bubble – ending up in a crash.
That is a sign we need to look out for: lenders lowering mortgage lending standards and issuing high-risk loans that lead to a crash in the housing market.
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Mortgage loans and insurance
Next, you need to look out for increasing mortgage loans that are in need of insurance. Buyers who might not be able to make the full down payment are considered to be riskier. So, they are recommended to buy mortgage insurance.
Such buyers would experience negative equity (where they require to pay more for their home than they are required to). During a bubble, if there is a demand for mortgage insurance, such homes are considered to be overvalued, which would lead to foreclosures and a crash in the housing market.
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Foreclosure activity
Look out for signs of increasing foreclosure activities. These indicate a nearing market crash. When homeowners are unable to afford their mortgages, the banks possess their homes and auction these homes. This process is referred to as foreclosures.
As discussed earlier, a home with a loan to value ratio (LTV) surpassing 100% implies that the homeowner owes more than the property’s actual worth. A 50% ratio indicates the home’s worth is double the amount. A ratio of 125% indicates that serious financial trouble is brewing for the homeowner.
In the US, the national foreclosure rate is always on a scale of 45,000 to 60,000 per month. Compare the state and local area’s foreclosure rates with the national rate for a better understanding of the signs leading to a possible market crash.
Closing thoughts
If it is just one or two signs, we could not take them as red flags for a possible market crash. Always keep an eye out for the trends in your local, state, and national market to understand better where your market is heading.
If you are looking for real estate agents in Nebraska, reach out to our team at Location Lincoln. Ours is a Lincoln-based real estate agency that will help you to find your dream home in Lincoln.
