Is The Real Estate Market Going To Crash?

Is The Real Estate Market Going to Crash

On this podcast episode, I talk about one of the most frequent questions I am asked lately, which is: “Is the real estate market going to crash”?

While I don’t think it’s going to be like 2008 (although there is a very small chance it could be), the more likely outcome is a pullback in prices that will entice buyers back to the table.

The main difference between 2008 and now, is that the reason that we got into the financial crisis back then was because banks had made very bad loans to borrowers that should not have been getting approved for mortgages.

There were No Income/No Job Loans (Ninja Loans), and No Income/No Assets (Nina Loans). Literally, anyone with a pulse could get approved for a mortgage, and “stated income” and “no doc” loans were very common.

Many of these loans were adjustable rate mortgages which reset at a higher Interest rate and some of them were even negative amortization loans. We all know how that ended with the 2008 financial crisis (very badly). I suggest you watch the movie “The Big Short” to learn about what happened back then.

I think that the banks learned from their lending mistakes in 2008, and so the lending criteria were much stricter after the financial crisis. So in theory, the quality of loans out there should be much better than the last financial crisis. There are also very few adjustable rate mortgages, and most of the mortgages are fixed rate mortgages, so there are much fewer mortgages that can reset. Also, prices have gone up so much that many homeowners have substantial equity and could simply sell.

So that’s the good news. The bad news is that the foreclosure moratorium has ended, and that has created a backlog of millions of people in foreclosure. These foreclosures and pre-foreclosures will need to run their course through the market. Many of those houses will go back to the bank and become bank owned properties. And those bank owned properties will be listed on the market at a discount in order to entice cash investors to buy them. That is your opportunity as an investor to buy those houses at a huge discount.

Those houses need to be sold, and that increase in inventory of houses listed on the market will put substantial downside pressure on pricing.

I am seeing many more pre-foreclosure, foreclosure and short sale leads, something we have not seen in many years. Learn how to market to homeowners in pre-foreclosure.

The increase in interest rates from 3% to 6% (and now back down to 5%) has made housing affordability a huge issue. Many borrowers have been “priced out” of the market or cannot afford the mortgage payment for a home at current interest rates and current prices. So something will need to give. Either the price or the interest rate (or both). I expect rates to move higher and prices to move lower.

This is yet another reason why we will see more inventory, more sellers, fewer buyers, and more pressure on prices moving down. And that assumes current interest rates. If rates go up substantially from here then that could be a big problem. We don’t know what rates will do but there are economists that are predicting rates could be as high as 7% or 8% by year end. If that were to happen, prices will decline more.

So do I expect a real estate market crash like in 2008? No, but I do expect a pullback of prices of maybe 10% or maybe even to be as bad as 20% to 25% lower than where we are right now.

To put that into perspective, a $300,000 house that declines by 25% would make that house worth $225,000. So if you are looking at ARV, and saying to yourself that a house is worth $300,000 then consider what it might be worth in 6 months or 1 year from now (lower).

Any price decline will result in more sellers getting nervous and more sellers putting their houses on the market. Sometimes human psychology can create a market hysteria that causes people to not act rationally. Homeowners that are negative or have little to no equity might.

Learn More About Buying Foreclosures, Short Sales, and Bank Owned Properties at My Boot Camp CLICK HERE!

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