Housing Market Crisis: Understanding the Causes and Consequences

The housing market crisis or housing market crash has been a predominant topic in the real estate market, particularly this year as house sales have hit an alarmingly low rate. The Wall Street Journal reported a significant decline in demand for homes and home sales. The direct correlation in rising home costs and shortage of buyers speaks volumes on the weight housing affordability influences the real estate market.

To further emphasize this, Nicole Friedman, a journalist for WSJ, cited that rising mortgage rates are cooling the U.S housing market. Mortgage applications from home buyers declined to their lowest level in 28 years. Factors such as higher borrowing costs as well as the overall increase in home prices are causing home buyers to step back.

This article highlights the common warning signs in real estate that would most likely lead to a housing market crisis and what this means for the real estate industry sector.

Warning Signs in Real Estate of a Housing Market Crisis

One of the most obvious warning signs of a potential slump in home improvement industry is a significant increase in housing prices, which exceeds the median income growth rate. This trend creates an imbalance between supply and demand, leading to a reduction in the number of potential buyers. Another warning sign is an oversupply of housing units in the market, which results in a drop in the prices and a subsequent lack of demand. Another indicator is when speculative investors enter the market, causing a rapid price increase, and when they exit, the housing market may collapse.

One of the telltale warning signs of a looming housing market crisis is when housing prices increase while homebuyer income growth rate remains the same. Home buyers simply can’t afford the increase in home prices when their income doesn’t match the growth accordingly. This naturally leads to a decrease in homebuyers and therefore a demand in homes.

These warning signs coincide with what WSJ has reported on stalled market momentum of home sales. WSJ reported a grounding halt in home sales as of late 2022. This caused home sales to hit an all time low of 36.9% sales rate. That, along with existing homeowners who managed to secure lower mortgage rates in 2020 and 2021 opted out of listing their homes for sale. This scarcity of listings, higher mortgage rates, and overall increase in the cost of homes are all signs of a housing market crisis.

What Triggers a Housing Market Crisis?

There are several reasons that can set a housing market crisis in motion. One main trigger is a significant increase in the following:

Increased interest rates
Higher mortgages
Higher loan value

As touched on earlier, when the various costs of home buying increase while home buyers income remains the same, lessens, or doesn’t grow accordingly, this creates an unfavorable economic landscape for real estate market growth. While the increase in prices is the most relevant trigger this year for the housing market crisis, there are other factors that can affect how well the market sells.

Natural Disasters

Natural disasters for instance have the potential to trigger a housing market crisis in various ways. Firstly, when a natural disaster occurs, the damage it causes to homes can cause a shortage in available homes for sale. If the demand for homes is high while the supply is low, the price for housing increases. This can eliminate an entire income bracket of home buyers, thus decreasing the total number of home sales.

Along with causing damage to homes, natural disasters also affect people’s livelihood and can be responsible for various job losses. As long as buyers’ purchasing power is compromised, a decline in sales and demand for housing is to be expected.

High Inflation

A housing market crisis can be triggered by high inflation due to its effect on the purchasing power of potential homebuyers. When inflation rates are high, the cost of living increases, leading people to spend more on essentials like food, healthcare, and energy. As a result, individuals may have less money available to allocate towards purchasing a home, which can lead to a decrease in demand for housing.

Increased interest rates commonly follow as well with high inflation. This makes it even more expensive to take out a mortgage or other loans. As a result, the number of potential homebuyers in the market are reduced. When this happens, a decline in housing demand soon follows, which can and will eventually trigger a housing market crisis.

Furthermore, high inflation can create a lack of confidence in the housing market, making homebuyers hesitant to invest in the market to begin with due to uncertainty regarding future price trends and the overall economic situation. As long as buyers are faced with increased prices on all fronts, a housing market crisis is to be expected.

Consequences of a Housing Market Crisis

The consequences of a housing market crisis negatively affects both individual homeowners and the economy as a whole. Homeowners who have invested in real estate can experience substantial losses, as their properties lose value. Some may face foreclosure or be forced to sell their homes at a significant loss. This can lead to a decrease in consumer confidence and a reevaluation on how sound an investment would be in the housing market. Any reservations on putting money into an imbalanced market landscape only worsens the housing market crisis.

Along with negatively affecting individual homeowners, a housing market crisis can also affect beyond its own economy. A decreased demand in houses cascades to a decreased demand for other industries and sectors such as:

Construction companies facing a decline in construction and building projects
Banks and other finance institutions that now deal with less mortgages, credit and investment capital
Less sales on home items such as furniture and appliances
An overall reduction in consumer spending

Overall, a housing market crisis doesn’t just affect potential home buyers. Issues with housing affordability can affect the economy as a whole too. With that said, you’d be remiss to not keep an eye out for triggers and warning signs that come before a housing market crisis. While governments and other stakeholders should act on regulating issues and preventing them, individuals should keep an eye out themselves for triggers of an impending crisis and housing market economic recession. After all, the housing market is significant to homeowners and the economy alike.