With recent inflation and the rise of mortgage rates, many fear we will have a housing market crash similar to 2009. Despite this, we are not seeing a lot of foreclosures impact homeowners. We are in a different market than we were in the crash of the earlier decade. This week, the team at Foundation Mortgage in Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee discusses why we will not see a wave of foreclosures in 2023.
What Causes a Housing Market Crash?
A housing market crash is a significant decline in property prices that can have wide-ranging economic and financial impacts. Several factors can contribute to a housing market crash, often working together in complex ways. Here are some key factors that can lead to a housing market crash:
Overvaluation and Speculation: If property prices become disconnected from their underlying fundamentals, such as income levels and rental values, a bubble can form. Speculators and investors may drive up prices based on the expectation of further gains, but eventually, the bubble bursts, leading to a rapid decline in prices.
Economic Downturn: A general economic recession can lead to job losses, reduced income, and financial uncertainty. This can impact the ability of potential buyers to afford homes, leading to decreased demand and falling prices.
Interest Rate Increases: Rising interest rates can make mortgage payments more expensive, reducing affordability for homebuyers. This can lead to decreased demand and downward pressure on prices.
Subprime Lending and Loose Credit Standards: The use of subprime lending and relaxed credit standards can lead to a situation where borrowers who are not financially qualified for mortgages are given loans. When many of these borrowers default on their loans, it can lead to a wave of foreclosures and oversupply of homes, causing prices to drop.
Supply and Demand Imbalance: Rapidly increasing housing construction can lead to an oversupply of properties, outpacing demand. This surplus can lead to a downward pressure on prices.
Job Losses and Population Decline: Significant job losses in an area or a declining population can lead to a reduced demand for housing, causing prices to fall.
Tightened Lending Standards: In response to a housing bubble or financial crisis, banks might tighten their lending standards, making it harder for potential buyers to obtain mortgages. This can lead to reduced demand and declining prices.
Foreclosures and Distressed Sales: A high number of foreclosures and distressed sales (e.g., short sales) can flood the market with discounted properties, dragging down overall property values.
Market Sentiment and Fear: Negative news, market speculation, or fear of a crash itself can cause a sudden decrease in demand as potential buyers hold off on making purchases, contributing to a downward spiral in prices.
Global Economic Factors: Economic instability in other parts of the world can influence international investment and capital flows, which can affect the demand for properties in a particular region.
Natural Disasters or Events: Natural disasters like hurricanes, earthquakes, or other catastrophic events can damage properties and reduce demand, causing prices to drop.
Government Policy Changes: Changes in government policies related to taxes, regulations, or housing incentives can impact the demand for housing and potentially lead to price declines.
A housing market crash is often the result of a combination of these factors, and their effects can vary based on local market conditions and the severity of the circumstances. It’s important to note that while housing market crashes are rare and have far-reaching implications, they are a natural part of economic cycles.
Foreclosures not Indicative of Coming Crash
Millions of Americans lost their home to foreclosure in the last housing market crash. Shaky underwriting practices and a large appetite for mortgages helped contribute to this. Many people wonder if rising mortgage rates and cost of living will create a new set of foreclosures. However, data does not show a similar pattern of distressed properties. Today’s tighter mortgage underwriting standards are helping protect people from bad mortgages. Fortunately, that has led to a lower rate of delinquency on loan payments. In addition, less foreclosures are being started, in progress, or completed than in 2008-09.
In the housing market, COVID also impacted things, but not at the same level as 2009. Many mortgage protection programs helped stop the tidal wave of evictions. Lenders and borrowers worked out payment plans and forbearance allowances that were successful. In addition, foreclosures were temporarily paused, giving people time to get their lives back in order. Once forbearance was lifted, the foreclosures that did occur did not match the numbers seen back in the housing crash. Many news headlines still say that foreclosures are up, but when looking at the historic context, it is clear a crash is not as evident.
People Still Have Equity in Their Homes
If homeowners do need to get out, data shows that many have enough equity in their home to sell as opposed to foreclose. Since home prices have skyrocketed, so too have the value and equity in homes. Many that have been living in their home a long time have equity to tap and weather downturns. This is true even if home prices decline, which is very unlikely to happen. Even though foreclosures are up this year from last year, data shows that people can withstand the pressure and we will avoid a wave of millions of foreclosures. The housing market is still very hot in many regions of the country.
The professionals at Foundation Mortgage are here to help you sell your home or leverage its worth in in Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee. Contact one of our helpful staff to learn more about selling or taking out an equity loan today!