Before we dive into ways to predict a housing market crash, let’s take a closer look at what a crash is. In 2007, the economy faced a housing market crash, a direct impact of the Great Recession.
Home prices began to soar, reaching new-highs. Soon, mortgage-backed securities were sold off in large volumes, and mortgage defaults and foreclosures rose to record-breaking levels.
Potential housing market buyers felt the financial strain and postponed or canceled their home purchases. This overturned the economy and subprime borrowers found themselves paying high monthly mortgage rates.
1) High Interest Rates Means Homeownership Is Put Out Of Reach
Interest rates and the spread of credit play a crucial role in the availability of credit to build houses. Most homebuyers do not pay capital upfront, mainly because they don’t have half a million dollars to invest in real estate.
Today, housing prices are 30% higher than in 2008, indicating that even more credit has been pumped into the economy. When the next crash occurs, there could be a severe decline in house prices.
Identifying housing market indicators is key to predicting housing market crashes. Indicators like building permits, housing starts, and new home sales data are released once every month, available for free download.
At the start of every month, the building permits predict the number of new housing starts while the new housing starts predict the number of new home sales in the region. This cycle is almost always on repeat.