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During the pandemic, housing prices exponentially increased. This, paired with tons of economic problems due to the pandemic, has made many people wonder whether we’re headed for a housing market crash soon. Unfortunately, there is no answer to this question, but we can get insight by looking at both points of view. Some believe there will be a crash, while others do not. 

The Housing Market Will Not Crash

Through 2021, as more and more opened back up and businesses went back to normal, the housing market has continued to thrive. Interest rates remain low, but increases are expected to be gradual. However, inflation is still a very real possibility. 

Effect of Inflation

Inflation has increased throughout the year, which will increase home prices. Because inflation increases the prices of materials rise and investors begin putting more money into real estate. Therefore, home prices are expected to continue rising. 

The pandemic has made more individuals move into larger homes, which are priced higher than small homes. Single-family homes, in particular, are continuing to grow. 

Remote Work 

While many were laid off during the pandemic and out of work for long periods, workers who were able to work remotely decided to move to larger homes where they could have an office or at least a separate place for work. Other individuals moved from densely populated areas with high rents to the suburbs, where they could afford a mortgage that was cheaper than their rent. 

Remote work is likely to continue even though offices continue to reopen, which means a continued shift to suburb living. As more employees are getting the option to work from home permanently, we may even see more renovations that include home offices. 

Cost of Lumber

Increased costs of lumber, along with other expenses that go into home construction, will further increase home prices. Believe it not, demand for lumber did not decline during the pandemic, even though the ability to supply lumber did, which drove prices up even more. 

Home Supply

Simply put, the housing market is based on supply and demand. When supply is high there are tons of houses for sale, but the demand is low with few buyers, which leads to decreasing costs of homes. Right now, there is a high demand with few houses for sale, which means sellers can potentially price their homes higher than market value. 

Until there is more housing inventory, there will continue to be rising home prices

Home Prices Will Decrease But Not Drop

At some point, everyone who was looking to buy a home will stop the search for one reason or another. Maybe they bought the house they wanted, or maybe they decided now was not the right time to make a purchase. During the beginning of the pandemic in 2020, many people took advantage of the low interest rates, which increased home sales and depleted the supply of homes. 

However, these significant increases will meet their end at some point. Median home prices have already continued to decrease since the beginning of the pandemic and are expected to gradually continue, but it will be nothing like the drop in prices we saw in the last housing market crash. 

Mortgage Forbearance

The effects of high unemployment during the pandemic had little resemblance to the last recession, which can be attributed to forbearance programs. These programs allow homeowners to postpone their mortgage payments without penalty. 

Many homeowners took advantage of these forbearance plans at the beginning of the pandemic. Thankfully many of these individuals have returned to work within the last few months and were able to keep up with their mortgage payments, making delinquencies lower as time went on.

Unfortunately, some homeowners in forbearance won’t be able to secure loan modification or a different type of repayment plan from their lenders, which means they could lose their homes when the forbearance programs end. 

Remember, not everyone has returned to work. Some were business owners whose businesses went out during the pandemic, and some were completely laid off. These individuals who have not returned to work or earned a paycheck since 2020 cannot pay off their mortgages. This means there will be more foreclosures and loan defaults than there were in 2019, but it’s not expected to affect as many homeowners as the crash in the 2000s.

 

The Housing Market Will Crash

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One of the causes of the recession in the mid-2000s was the housing market. During this time, lending standards were looser, which caused irresponsible underwriting and lending practices. When borrowers couldn’t pay their mortgages, they foreclosed, which sent a ripple effect through the economy. Because of this, there are tougher standards for mortgage lending. 

While lending practices are no longer as loose as they used to be, some are seeing similarities between the recession and today’s housing market. Nobody expects the housing market to crash overnight, but rising prices are something that concerns many.

Unhealthy Economy

Some believe a crash might happen due to the inherent unhealthy economy. Currently, government debt is on the rise, and the unemployment rate is still high after the pandemic. Not to mention, there were hundreds of thousands of business closures over the last year. 

Increase in Home Prices

During this time, home prices increased exponentially, which left many putting their belongings in storage containers and moving to smaller homes or rentals. When paired with the high unemployment rate, high home prices mean there might be a time when there are too many houses for sale and not enough buyers. Many people who were going to purchase a home during the pandemic have already done so, while others are unable to purchase a new home due to the continuing rising costs. 

Final Thoughts

While nobody knows for sure what the future holds, we can’t expect the crash to be as severe as the last recession, even if there is one. However, the boom that the housing market is currently experiencing cannot last forever, which means ultimately, home prices will drop and even back out to normal. 

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