Housing Market Crash

What is a Housing Market Crash?

A housing market crash is best defined as a major drop in property prices that happens over a short period of time. This is bad news for homeowners as it means the value of their houses has dropped significantly and may fall further.

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Techopedia Explains the Housing Market Crash Meaning

A housing market crash occurs when property prices suddenly collapse within a relatively short period of time. It means the valuations of houses will have fallen, which will have an impact on existing homeowners and those looking to buy.

Techopedia Explains the Housing Market Crash Meaning

How Does a Housing Market Crash Affect Homeowners?

A real estate market crash is never good news for homeowners because it means the value of their properties will decline. However, some will be more affected than others.

For example, those looking to sell their homes could be forced to reduce the price to attract a buyer. Those who have effectively bought at the top of the market, when prices were high, could find they now owe more than their property is actually worth. This is known as negative equity.

If they are able to carry on with their mortgage repayments, the hope is that prices may start to eventually rise, and they can climb out of this economic situation. Of course, if the crash is due to rising interest rates or an economic downturn, they may not be able to keep up with their repayments and could end up losing their homes.

Can Anyone Benefit from a Housing Market Crash?

First-time buyers who are looking to get on the property market could benefit from a sudden housing market crash as properties will have become cheaper. It means they can either pay less for the same type of property they were interested in or see if they can now afford something larger. Buying when prices have recently crashed could mean they make a bumper profit when valuations start to recover.

History shows that property prices generally recover over time. Of course, the difficulty is knowing if the market has reached the bottom or how long it could be until prices start to rise.

History of Housing Market Crashes

There have been a number of housing market crashes over the years, according to an analysis by Purplebricks, the online estate agency.

The most recent was during the 2008 financial crisis, when a collapsing US housing market and reckless lending triggered a global meltdown.

However, there were also housing market crashes during the early 1990s and the mid-1970s, as well as the 1950s and even back to the Great Depression of the 1920s. Purplebricks pointed out that such slumps are due to a variety of reasons, including economic downturns and policy changes.

“These crashes can have far-reaching consequences, including job losses and widespread economic uncertainty,” it stated.

Causes of a Housing Market Crash

There are many issues that can play a role in a housing market downturn. All of them can adversely affect people’s desire and ability to buy properties. Let’s look at some of them.

Economic Factors Contributing to a Housing Market Crash

  • Overinflated property prices
  • An economic downturn
  • Increasing unemployment
  • Government policy changes
  • Increasing interest rates
  • High inflation
  • Less access to mortgages

Housing Bubble

So, what is the most accurate housing bubble definition? A housing bubble sees property prices rise rapidly on the back of strong demand, speculative purchasers, and the availability of cheap lending. It will often be created when there are not enough properties to satisfy the needs of would-be homeowners, and sellers capitalize by putting up prices.

The bubble that’s created can then burst when people realize properties have become too expensive or an economic factor occurs, such as a rise in interest rates.

Interest Rates and the Housing Market Crash

Interest rates can play a significant role in a housing market crash. When they are low, the cost of borrowing is cheaper. This makes buying a property more affordable and attractive.

However, the converse is also true. Should interest rates start to rise, lending costs will also increase and it will become more expensive to buy.

Federal Funds Rate over the past 10 years
Source: Macrotrends

Recent Housing Market Crash Examples

The most recent housing market crash came between 2007 and 2009. A housing bubble was created due to cheap credit and rapidly rising property prices. A key factor was an increase in so-called subprime mortgages, which involves lending to buyers with generally poor credit histories.

The subsequent downturn in the overinflated housing market prompted a collapse in the subprime market, with many lenders declaring bankruptcy.

How the Housing Market and Economy are Linked

The housing market is closely linked to consumer spending, according to a report by the Bank of England.

“When house prices go up, homeowners become better off and feel more confident,” it stated. “Some people will borrow more against the value of their home, either to spend on goods and services, renovate their house, supplement their pension, or pay off other debt.”

However, when house prices go down, homeowners are concerned that their house may be worth less than their outstanding mortgage. “People are therefore more likely to cut down on spending and hold off from making personal investments,” it concluded.

Will the Housing Market Crash?

At the start of 2024, there were widespread concerns that the housing markets in several countries could be heading for turbulent times. However, industry observers appear more optimistic.

The US economic outlook remains broadly positive, and there could be a modest recovery in home sales, according to Freddie Mac, the Federal home loan mortgage corporation.

“We expect upward pressure on home prices to remain as more first-time homebuyers continue to flood the housing market that is plagued by a lack of supply,” it stated. “As a result, we forecast home prices to increase 2.5% in 2024 and 2.1% in 2025.”

In the UK, meanwhile, property values rose 0.7% in February, according to the Nationwide House Price Index. Prices are now around 3% below the all-time highs in the summer of 1992.

The decline in borrowing costs has prompted an uptick in the housing market, while there’s been a rise in new buyer inquiries. “Nevertheless, near-term prospects remain highly uncertain, in part due to ongoing uncertainty about the future path of interest rates,” it added.

The Bottom Line

A housing market crash can be devastating for homeowners as it means the value of their properties will have fallen. In the worst-case scenarios, such a slump will be caused by an economic downturn or rising interest rates, meaning they can’t afford their mortgages.

However, predicting when a crash is likely to occur is extremely difficult, as is trying to call the bottom of the market. Potential homeowners must ensure they’re not stretching themselves too financially thinly when they take out a mortgage.

FAQs

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Rob Griffin
Financial Journalist

Rob is a seasoned journalist with over three decades of experience spanning across business and finance journalism. Before embarking on a freelance career in 2002, he contributed his expertise to the business desks of notable publications such as the The Guardian, Yorkshire Post, Sunday Business (now Business Post), and Sunday Express. Throughout his freelance journey, Rob has been a regular contributor to a wide range of national newspapers, consumer magazines, trade publications, and websites. His work has appeared in titles such as The Independent, Citywire, Daily Express, FT Adviser, and Sunday Telegraph, covering an array of subjects from market trends…