You’re probably wondering what’s in store for the real estate market as 2022 winds down. We know that experts have predicted a turn in 2023 with the reemergence of a buyer’s market. Most of us likely have a different question in mind: is the U.S. housing market heading for a crash?
It’s not a new question. As the real estate market soared to new heights in 2020 and 2021, everyone was waiting for the other shoe to drop. However, real estate investors have no need to worry.
Not only is a market crash unlikely (and we’ll tell you why!), but real estate investors both benefit and play an integral role in today’s housing market – regardless of the circumstances.
Why You Can Forget Market Crash Talk
1. Inventory continues to be an issue—for better or worse
We’re unlikely to see the balance of supply and demand reverse in a way that would lead to a housing crash. Supply has been persistently short, not just in the pandemic era but through the aftershocks of the Great Recession. Even though homebuilders are doing their best to bolster inventory, they’re trying to catch up to a decade’s worth of housing deficits.
If prices begin to correct and interest rates ease, we may see more eager buyers willing to throw their hat into the ring. So many, after all, were pushed out when prices grew too high. Now, new housing inventory did reach an 8.1-month supply in August. Supply hit its most recent low of 3.3 months in August 2020.
But remember, new homes are largely failing to serve the demographic with the highest demand for housing: new homebuyers. The market is lacking in affordable starter homes. Nearly all new inventory falls above acceptable starter home pricing.
Traditional homebuilding can’t keep up – the cost of land, labor, and materials means that houses cost more to meet their profit margins. In part, that’s why we’re seeing the rise of the build-to-rent phenomenon.
2. LTV rates provide a financial buffer
Right now, U.S. homeowner equity in real estate is as high as it’s ever been at 29,000 billion dollars’ worth in Q2 2022. Loan-to-value ratios are looking more favorable, too. In 2016, the average LTV for U.S. households was 55%. In 2020, it hit 35%. That means there was far more equity than debt, creating a significant financial buffer for homeowners.
It means that the average household isn’t going to be underwater any time soon. They also have plenty of opportunities to leverage their equity in lending negotiations and refinancing. Remember, too, that lending hasn’t necessarily been easier. Lending standards haven’t changed.
3. Mortgage rates will ease up in time
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Mortgage rates have been going up in a federal effort to ease the white-hot housing market. And it’s working. We’ve seen prices come down across multiple U.S. markets (though at varying paces). Additionally, inflation will see rates ease over the next year or two. This will make it more manageable to buy real estate again and will prompt the return of buyers who have been sitting on the sidelines.
The trend for decades has been downward for mortgage interest rates. Though they’re going up right now, it’s very likely we’ll see a return to the usual pattern.
4. The inflation equation
We’re in the middle of an inflationary period. Because real estate is a hedge against inflation – its value increases with inflation, protecting your equity in a property – don't expect an earth-shattering price crash. The housing market benefits from inflation, plain and simple. If you already own property, you’re in a good spot.
Beyond that, rent prices are unlikely to change much, also thanks to inflation. The markets that were impacted by faltering rental demand in 2020 have rebounded. Inflation can throw a wrench into the works – particularly as American households struggle to survive on their current income.
Ultimately, a real estate market crash? It’s not out of the question. It’s just unlikely.
The market climate we’re in now is wildly different to the one leading up to the Great Recession. Even if a recession hits, the housing market has so much going for it that it’s unlikely to divert its course. We may see a tempering of the market and a more buyer-friendly environment, but not a full-on implosion.
