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I’ve been seeing a lot of posts on Facebook about another housing crash coming. Many people assume there will be a crash just as bad or worse than the last crash we had about 10 years ago. Since the markets are obviously going to crash, they reason, they will wait to buy real estate until prices plummet.
I can understand why people have this attitude, as I would much rather buy houses when they are cheap after a crash than now when prices are high. The problem I have with this viewpoint is that there is no guarantee there will be a housing market crash, and even if there is, how could you know where the bottom hits?
Will there be another housing market crash?
I got my real estate license in 2002 and have been selling houses as well as investing in real estate since then. I worked right through the last crash, flipping houses and selling them for regular clients as well as banks and HUD. I have a lot of firsthand knowledge of the downturn, what happened and how it happened.
Before the housing market crisis from 2008 to 2012, the banks were being foolish. They were making outlandish loans to just about anyone who wanted a house or even two houses. I know an investor in northern Colorado who bought hundreds of new houses using hardly any of his own money. Because there was so much demand, houses were being built rapidly. Many areas of the country saw record amounts of building.
Then the bottom fell out when we realized the banks were creating toxic loans that had a good chance of never being paid back. Lending guidelines changed overnight and builders were left with tons of inventory and no buyers. The crash ensued because there were so many homes for sale and not enough people to buy them.
This time around, the banks have not been issuing these unwise loans. Lending guidelines are still very strict and while you may hear of some subprime lending going on today, it is a fraction of what was going on before the crash. New construction for single-family homes (download required) still has not returned to its average pace even after years of record-low building. There are simply not enough homes for buyers and that is what is driving up prices this time around.
Affordability and interest rates could slow down the market, and we may even be seeing the start of that now. However, those things do not cause a crash. They could cause a slowdown or even a slight decrease in prices, but many other countries have less affordability than the U.S. for decades.
A crash could occur, but I would not say it is imminent.
Is it smart to wait for the housing market to crash before you buy?
It is easy to look back on the last crash and say that I should have bought 100 houses right at the bottom. I bought quite a few homes at the bottom of the market, but I also bought homes on the way down and on the way up. I bought houses based on my investment criteria whether they were flips or rentals without assuming prices would increase. I also left plenty of room in my purchases for prices to decrease.
Timing the market is a very tough thing to do. When I bought houses at their low I was assuming they would jump back up in price. I could make money if prices stayed right where they were, and if they went up in value that was a bonus. The same thing can be done in any real estate market. But it is much scarier to buy houses when prices have been increasing for seven years straight.
If you are sitting on the sideline waiting for a crash to occur, do you have a plan for when that happens or are you just waiting? How low will prices have to go? How will you know when the bottom hits? Are you waiting for a decent deal or an amazing deal? I think many people who are waiting for a crash have not thought these questions through; they just want to buy at the bottom and sell at the top. (And it is just as tough to know when the top is.)
Something else to consider is that there are thousands of other investors waiting for prices to drop, including huge institutional buyers. There is a really good chance that if prices start to drop, the other investors will jump in and purchase enough homes to keep the markets from dropping very far.
What can we expect for the future of the housing market?
I try not to predict what will happen. I can make a guess, but I do not base my investment decisions on whether the markets will increase or decrease. I never thought prices would have risen as high as they have, but I also would have thought the builders would have built many more homes than they have.
I really liked buying rental properties in 2010 through 2014. I wish I could buy houses in that price range again in my area, but I can’t. We will probably never see prices as low as they were 10 years ago, unless there is some kind of massive economic or natural disaster that will have most of us forgetting about housing altogether. That leaves us investing in other asset classes like commercial buildings or going to other markets. I am certainly not sitting on the sidelines hoping for a crash that may or may not happen, and neither should you.