Will the Housing Market Crash?

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Rising home prices have led people to wonder whether the United States is in a housing bubble. More importantly, are we heading toward a housing market crash?

Fitch Ratings, a credit ratings and analysis company for financial markets, estimated that national home prices were overvalued by 8.2% as of March 31, 2021. Fitch also calculated that home prices in the U.S. grew by more than 10% last year, more than they had since 2014.

Incredible demand has led to the overvaluation of homes, and in some cases, bidding wars. But money expert Clark Howard sees differences between what’s happening now and the period before the housing market crashed in the late 2000s.

In this article, I’ll explore those differences and share Clark’s advice for people considering entering the housing market in 2021.

Clark’s Prediction on the Housing Market

The huge demand in the housing market right now has led people to wonder whether another crash will be coming soon. Clark discussed the issue in a recent podcast.

“We are not going to have a housing crash. Not gonna happen,” he said. “The circumstances are totally different than they were in the banking scandals and the real estate crash that went from ’07 to ’12.”

What Is Similar and Different Between the Housing Market in 2021 and in the Pre-Recession Years?

Both times, there’s been a huge demand for houses. But the source and reasons for the demand are different this time around.

From 1999-2008, banks and other lenders created a strong market for subprime mortgages. This encouraged irresponsible lending. 

With relaxed lending standards, potential homebuyers flooded the market, which increased housing prices. It was such a seller’s market that even if a homeowner defaulted, a bank could foreclose and re-sell the house without a loss.

But eventually, the market slowed, and the bubble burst. People who couldn’t afford their loans found themselves in upside-down mortgages and were forced to default. The banks and third-party lenders that purchased subprime mortgages entered a crisis, and the financial system froze up. The U.S. stock market crashed on Sept. 29, 2008.

While demand for houses is rising again, it’s not because of subprime mortgages. Wall Street Journal housing reporter Nicole Friedman writes, “Buyers are drawn to the market by historically low interest rates, not by easy access to credit.”

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The housing supply is also much different in 2021 than it was in 2006. 

Yes, new housing starts dropped like a rock at the onset of the COVID-19 pandemic, but they were already low. In a February 26, 2021 article, The New York Times reported, “For more than a decade, less housing has been built relative to historical averages.”

Reasons Housing Demand Is High

According to The National Association of Realtors, the median sales prices on existing homes reached historic highs in March 2021. And the average time houses are spending on the market is at a record low.

There are a few different reasons for this.

Millennials Entering the Market

The millennial generation, also known as Generation Y, includes more than 72 million Americans; it’s the biggest generation in U.S. history. A large portion of that generation is now over the age of 30, so they’re entering their prime home purchasing years.

Over the last five years, millennials have accounted for the largest share of home mortgage applications, making up more than half of home purchase mortgage applications in 2020. That’s according to Core Logic, a California-based corporation that researches and analyzes financial and property information.

Millennials are also leading the way in purchasing homes according to a report from the National Association of Realtors (NAR). It says millennials accounted for 37% of all homebuyers from July 2019-June 2020, many of them first-time buyers.

Generation Y entering the housing market is just one of the reasons for the tremendous demand. There are a couple of other factors too.

Historically Low Mortgage Interest Rates

The 30-year, fixed rate mortgage average in the U.S. hit a record-low 2.65% in January 2021 according to Federal Reserve Economic Data (FRED).

The COVID-19 pandemic has played a role in mortgage rates, but they were low even before it started. FRED reports the 30-year, fixed rate mortgage average hasn’t been above 4.5% since January 2019.

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COVID-19’s Impact on Home Values

According to a survey from remote working site FlexJobs, 65% of people working remotely during the pandemic want to keep working from home.

Because of additional time spent in their homes during the pandemic, Americans have started to rethink their housing situations, according to Ali Wolf, the chief economist for Zonda, a real estate analytics firm. Wolf told Clark.com, “At first, the housing market slowed to a crawl for 4-8 weeks starting last March, but as people spent more time at home, they realized their current living space could use an upgrade.”

“That, combined with even lower interest rates and flexibility to work-from-anywhere, started to turbocharge the housing market,” said Wolf. “Potential buyers that had been sitting on the sidelines were all of a sudden house hunting and scooping up any property they could find.”

Reasons Housing Supply Is Low

As I mentioned earlier in this article, housing supply in the United States is currently low, and that was the case even before the current demand hit.

Home Constructions Lagging for Years

After the housing market crash in the late 2000s, home construction declined dramatically and remained low into the 2010s. According to FRED, it wasn’t until 2013 that the market recovered to a pre-Recession benchmark of 1 million new housing starts in a month.

Home construction starts finally rose to 1.5 million in December 2019 before falling again when COVID shut everything down.

Millions of millennials entering the housing market and fewer homes being built compared to decades past might have been enough to create a housing supply shortage. But there are other factors in the mix right now as well.

Lumber Costs Have Skyrocketed

Because of the pandemic, many lumber manufacturers closed or curtailed their operations, at least in part because they expected demand for their products to fall. That happened, but then housing construction starts began rising again in early summer 2020. This helped lead to a supply gap in the lumber market.

Lumber prices have risen 300% since April 2020. As a result, the average price of a new single-family home has increased $36,000 according to the National Association of Home Builders.

Housing starts continue to rise, but there’s yet another problem. There was a shortage of construction workers even before the pandemic. And according to the 2021 Construction Outlook Survey from the Associated General Contractors of America, 54% of construction firms said they were having difficulty finding qualified workers.

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Bloomberg reported just last month that home builders are so inundated with demand, they are “suppressing orders” on houses and “shifting away from fixed prices” on newly-built homes. The report also says builders are moving toward speculative home construction without buyers so that they can wait as long as possible to set prices.

Seniors Remaining in Their Homes

Millennials aren’t the only generation changing the housing market. A lot of Baby Boomers and older Gen Xers are electing to stay in their current homes rather than downsizing as they age.

According to a 2018 AARP survey, 76% of Americans older than 50 said they would prefer to remain in their current homes and communities as they age. Almost half of that group said they anticipated staying put.

Also, the February New York Times article pointed out that, even if older homeowners were ready to leave their homes in favor of apartments or assisted living facilities, the health risks posed by the pandemic put many of those plans on hold.

With more seniors staying in their homes, there are fewer houses on the market. 

Clark’s Advice for 2021 Homebuyers and Sellers

It might seem like an impossible market for potential homebuyers right now. But Clark says, if you can afford it, it’s fine to buy right now if you are confident you’ll be able to make one long-term commitment to your investment: Plan to own any house you buy in 2021 for at least a decade.

“Your ownership cycle is the key metric here. Think about even people who bought just at the peak in 2006. If they stayed in the house long enough, they saw the values through the worst speculative markets and fully recovered mid-last decade or a little past that. …

“If you don’t want to have the potential of leaving the closing table owing money when you sell a home or any circumstance like that, if you buy in ‘21, you need to think about it as a house you will own until ‘31 or later.”

That was actually Clark’s advice on home buying even before the current price boom because, with the appreciation of the property over a decade, you recoup the initial mortgage costs.

Clark also has advice for sellers. While the market is advantageous to sellers this year, he points out that anyone who sells their house will need to avoid becoming a buyer in order to keep the earnings.

“If you are a seller, and you’re at a point in your life that you could sell, pocket the one-time gain, maybe become a renter, that’s how you really hold onto that score of making the big money from your sale,” Clark said.

Final Thoughts

The differences in the market today should give homebuyers confidence that there won’t be a housing market crash.

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Still, to make your 2021 home buying or selling experience financially smart, remember to follow Clark’s 10-year rule.

For even more tips, read our guide on how to buy a house in nine steps.

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