Real estate is a sector that’s been red-hot for many years now. Prices have skyrocketed in many regions of the country, and it seems like everyone and their cousin wants to become a real estate agent these days. As it turns out, however, all good things must come to an end eventually. So is the real estate market heading for a crash? A crash would certainly be bad news for many people – especially those who recently purchased properties as an investment rather than as an actual home. Many experts are concerned that the current state of the real estate market is setting up another bubble burst similar to what we saw in 2008 and 2009. Read on to learn more about whether or not a real estate crash could be coming this time around.
Table Of Contents
What Caused the Last Real Estate Crash?
The last real estate crash took place during the Great Recession, which officially lasted from December 2007 until June 2009. During this period, many sectors of the economy were negatively impacted by the subprime mortgage crisis. To understand the subprime mortgage crisis, let’s first break down what a mortgage is. A mortgage is a type of loan that allows people to purchase a house by promising to pay back the lender over time with interest. The subprime mortgage crisis occurred when many lenders began offering mortgages to people with lower credit scores or who had a smaller down payment. These people were given mortgages that allowed them to pay a lower down payment, but at a higher interest rate. In order to make up for the potential risk of these lower-grade mortgages, many lenders offered higher interest rates on these mortgages as well.
How a Real Estate Crash Could Happen
The key to understanding whether or not a real estate crash is coming involves examining the major risk factors in the real estate market. If you’re familiar with the last real estate crash, you might be wondering: how are these risk factors different compared to what happened 10 years ago? There are two main factors that could lead to a real estate crash: a sharp rise in interest rates and a sudden drop in the number of homebuyers. Because interest rates are currently at a record low, it’s likely that the Federal Reserve will start to increase them in the coming years. This could trigger a sharp rise in mortgage rates, which could cause a significant drop in home sales.
The Biggest Risk Factors in the Real Estate Market
The current climate of the real estate market is similar to what we saw during the subprime mortgage crisis in a few key ways. First, interest rates are at a record low and are expected to rise. In addition, homebuyers are putting less money down on homes than they have in the past. On top of those two factors, there are several other risk factors that could contribute to a real estate crash. Some experts believe that the real estate market has become overpriced in many regions, which could trigger an abrupt decline in home values. Also, the amount of new construction also remains high in many areas of the country, which could increase inventory and pressure home prices further.
Strategies to Protect Yourself During a Potential Crash
As we’ve seen, there are a few key risk factors that could contribute to a real estate crash. To protect yourself from those factors, you might consider the following strategies: First of all, if you’re planning to go into the real estate market as a buyer, make sure you have a contingency plan if mortgage rates rise significantly. If you’re planning to go into the real estate market as a seller, it might be a good time to start looking for a buyer now before prices decline any further. Finally, keep in mind that even though real estate is a proven long-term investment, it’s not without risk. No investment is a sure thing, and the real estate market could decline at any moment – especially if we see the risk factors that caused the last crash coming into play once again.
Bottom Line
The current climate of the real estate market is similar to what we saw during the subprime mortgage crisis in a few key ways. On top of those two factors, there are several other risk factors that could contribute to a real estate crash. First of all, if you’re planning to go into the real estate market as a buyer, make sure you have a contingency plan if mortgage rates rise significantly. Finally, keep in mind that even though real estate is a proven long-term investment, it’s not without risk. No investment is a sure thing, and the real estate market could decline at any moment – especially if we see the risk factors that caused the last crash coming into play once again.
If you found this article helpful, please subscribe to my newsletter by filling out the form below so you don’t miss out on any future posts. Also, if you have any article ideas in mind, feel free to leave a comment on a topic you would like covered in an upcoming post.
