A crash in the housing market can lead to many problems, the most common of which is foreclosures. When the market crashes, borrowers who can no longer afford to pay their mortgages could be forced to give up on their homes. The surge of foreclosures can then lead to lower property values in the surrounding area.
This exact scenario played out in the United States in 2008 when housing markets experienced a 50% dip in home values. While most experts believe a housing market crash is unlikely in 2023, there are some signs to watch out for to prepare for an impending crash and protect yourself financially.
Rapid Rise of Prices Suddenly Plateaus
One of the first signs that a housing crash may happen is when housing prices rise rapidly over a short period and then suddenly decline. Homeowners should be even more careful if the rapid price increases outpace income growth and other economic indicators.
During this period, experts advise against making any major real estate purchases and instead focus on diversifying their investments to protect their finances if a housing crash occurs.
Rising Mortgage Rates
Rising mortgage rates can significantly dampen an individual's enthusiasm to purchase real estate due to high-interest rates. When demand falls, home prices also fall.
Mortgage rates rose dramatically over the past year, hitting a new peak of 7.79% in late October. However, the rates have pulled back in the weeks since then, with the average 30-year mortgage rate falling to 6.71% as of Sunday, per the Business Insider.
Housing Inventory Drops
When the inventory of existing homes for sale drops, it may mean that homeowners are unwilling to sell their houses for fear that they would be unable to find another property they could afford. A low inventory may lead serious home buyers to compete for fewer houses on the market, which drives prices upward.
Should You Worry?
While preparing for emergencies is advisable, there is no reason to panic sell now. A housing market crash like in 2008 is unlikely to happen as foreclosure rates remain at 0.6%-a historic low. The country's labor market is also remaining strong despite layoffs earlier in the year, according to Motley Fool.
