Is the Housing Market About to Cool or Crash?

The Federal Reserve has set its sights on taming inflation, with the 30-year mortgage rate currently hovering around a hefty 7%. Their weapon of choice? Raising interest rates. This has sent shivers down the spines of many, especially those eyeing the red-hot housing market. But does it necessarily mean a full-blown crash is on the horizon? Let’s unpack what’s happening and how homebuyers can navigate this potential shift.

The Fed’s Inflation Fix and Housing

The Federal Reserve aims to reduce core inflation to a healthy 2%. One way to achieve this is by making borrowing more expensive. By raising interest rates, the Fed discourages people and businesses from taking out loans, which slows down the economy and cools off inflation. But here’s the rub: mortgages are loans, too. As rates rise, so does the monthly payment for that dream home. This could potentially price some first-time buyers out of the market.

So, Crash or Correction?

Experts predict a cooling rather than a crash. Prices might not skyrocket at the breakneck pace we’ve seen in recent years, and there could even be a slight dip in some areas; with the blended average of 7% discount off asking prices nationwide, it may take another 5% approx to rebalance affordability. But a full-on 2008-style collapse is unlikely due to several factors:

• Strong underlying economy: The job market is healthy, and wages are rising, which means people can still afford homes, even at slightly higher interest rates.
• Tighter lending standards: Banks are more cautious after the 2008 crisis, so risky lending practices that fueled the bubble back then are less likely.
• Inventory shortage: While demand might soften, there’s still a lack of available homes in many areas, which could prevent a drastic price drop.

Moves in a Shifting Market

Whether you’re a renter or ready to buy, here’s how you can make the most of this situation:

• For Renters: Be Strategic in Your Negotiations. Landlords may have the advantage in a competitive rental market where demand outstrips supply. However, this doesn’t mean renters are without leverage. You may still negotiate favorable terms by presenting yourself as a reliable and desirable tenant, highlighting a positive rental history, or offering to sign a longer lease term.
• First-time buyers: Do your research. Be prepared to act quickly on the right property, even if it means offering slightly above the asking price if the property is underpriced or negotiating, of course, if it is overpriced. Get pre-approved for a mortgage to show you’re a serious buyer.
• Considering Selling?: List strategically. Work with an experienced real estate agent to price your home competitively in the new market.

Profiting from a Shift?

While a housing crash isn’t likely, a cooling market could present opportunities for savvy investors. Here are some things to consider:

• Become a Landlord: Investing in rental properties could offer steady income if you can manage them effectively. However, be aware of the responsibilities and potential risks.
• House Flipping (with Caution): If you have the resources and expertise, you can find deals on undervalued properties and fix them for resale. However, flipping houses is risky and requires significant market knowledge. We are firm believers in the buy-and-hold strategy to maximize gains.

The Pace of Price Growth is Likely to Slow

Think of it like taking your foot off the gas pedal on a speeding car. Prices won’t necessarily plummet, but the dramatic increases we’ve seen recently will likely taper off. Here’s why:

• Higher Borrowing Costs: As interest rates rise, mortgages become more expensive. This reduces the amount buyers can qualify for, which takes some steam out of bidding wars and limits the height of prices.
• Shifting Buyer Psychology: With the “get in now before it’s too late” mentality fading, some buyers might become more cautious, waiting for a better deal or deciding to rent for a while. This could lead to less competition and a more balanced market.

Regional Variations are Likely

Don’t expect a uniform cooling across the entire country. Here’s what could influence price changes in specific areas:

• Inventory Levels: Areas with a persistent housing shortage might see a minor price dip than those with growing houses on the market.
• Local Economic Strength: Areas with booming job markets and strong wage growth could see a softer price correction than areas with stagnant economies.

A Price Dip Doesn’t Necessarily Mean a Crash

It’s important to remember the context of the current market. We’re coming off a period of historically low-interest rates and surging demand, which inflated prices. A slight decrease wouldn’t necessarily indicate a crash but rather a return to a more normal market equilibrium.

Here’s a spectrum of possibilities for housing prices:

• Best Case Scenario: A soft landing. Prices stabilize and grow at a slower, more sustainable rate. This could be ideal for first-time buyers priced out in recent years.
• Worst Case Scenario: A more significant correction. While unlikely due to the abovementioned factors, a deeper economic downturn could lead to a steeper price decline. This could be risky for homeowners who bought at the peak but might present opportunities for patient investors.

The Bottom Line

The future of housing prices is uncertain, but with the correct information, millennials can be prepared. Keep an eye on your local market trends, get expert advice from a realtor or financial advisor, and consider your financial goals before making big decisions. By staying informed and making strategic moves, you can use this market shift to your advantage, whether finding your dream home or making a sound investment.