Massive Housing Crash Ahead — Should You Invest in Real Estate Now?
By: Roshan Singh
Tags: Investment, Real Estate Investments, Business, Real Estate, Business Strategy

Photo by Outsite Co on Unsplash

If you turn on the news, besides the epidemic, everyone is discussing the housing bubble. Experts are warning that the housing market will crash in 2021. And as a piece of evidence, they bring the example of the 2008 crash that 2020 is following the same patterns so the housing market should crash again next year.

And this is pretty interesting because if we are in a bubble that will burst next year, it will present a golden opportunity for a lot of people to jump in and make a fortune. After all, a housing bubble means that houses will be sold at a fraction of their real price once the bubble burst.

Imagine at $200,000 home that you wanted to buy is suddenly on sale for 70 or $80,000 and interest rates are so low that you can get it immediately if you can make the down payment. Doesn’t that sound like a golden opportunity?

Everyone likes investing in the real state because for some weird reason we believe that real estate prices will always rise however we have seen countless times that’s not the case and house prices can drop. To figure out if investing in a real state now is a good idea or not we have to understand a few things.

Do home prices always rise?

And finally when exactly the market will crash?

How housing bubbles area created?

The 2008 Crash — The mother of Housing Bubbles

One of the tools the fed has at its disposal to control the economy is the interest rate. When the economy is rising too fast, the government intervenes and raises interest rates to stop the flow of capital into the market so that economicnomy upturn intotointo a bubble.

High-interest rates mean borrowing money becomes expensive which means fewer people would borrow money which will result in less spending. And vice versa. That's known as Monetary policy. So back in th00s, when the ".com" bubble burst, the stock market lost almost 5 trillion dollars of market cap, the economy was in a recession, so the fed lowered interest rates.

From around 3 per cent to 2.5 then to 2 per cent down to a little over 1 per cent to encourage everyone to borrow money and spend to get back the economy on its knees.

And it worked, by 2003 the economy began recovering, by 2006, the stock market reached its pre dot com crash level. But low-interest rates means a low rate of return on government bond and interest on fixed despots.

It no longer made sense for investors to buy government bonds or keep their pile of cash in the banks since inflation would slowly eat it away especially when a few years ago, they made unbeliever returns during the dot com bubble, the s&p500 rose by over 400 per cent from 1995 to 2000.

So investors were looking for a new opportunity, a safe and rising investment to throw their money at and real estate seemed like a great idea but the investor doesn’t have the time to deal with individual buyers so financial institutions came with a brilliant idea.

Since interest rates were so low, everyone was buying a house, so financial institutions would take these mortgages, bundle them together and sell them to investors in forms of shares. These investments [proved to be great, but banks run out of financially responsible people to loan mortgages but investors still wanted to buy these investments.

So banks started giving subprime mortgages or mortgages to people with really low credit scores, people didn’t necessarily have enough income to keep making the mortgage payments. Why? Because they would take these mortgages, bundle them together and sell them to investors.

Low-interest rates and rising home prices kept attracting more and more investors. The reason why these investments appeared so seductive is that the investors argued that, even if they would default on their loan, it's not a big deal, the bank can get back the house and sell it and since home prices were rising, they would still make a profit.

It seemed like the perfect investment. So the banks gave mortgages to everyone, that inflated home prices to unbelievable heights, but at some point, one of the borrowers defaulted. So his home was put on sale, then the second one, then the third.

Soon, there were so many homes on sale but not enough buyers, and home prices began to fall. When people say that their 500K dollars mortgage house is suddenly worth only 250K, it stopped making sense for them to keep making mortgage payments so they walked away from them.

Now there were even more houses on sale, driving home prices even lower. So the banks were left with a lot of worthless mortgages that no one wanted to buy so they went bankrupt one after another.

How is this all related to the 2021 crash?

Well, the government intervened and saved the big banks in return that they would tighten their regulations and won’t randomly give mortgage unless they have high enough credit score and can make the monthly payments.

For some time, they did, if in 2010, you would try to get a mortgage, the banks would require you an endless number of documents to prove you are financially responsible and you have a stable job that will allow you to make mortgage payments on time.

So, Home price returned to their pre crises level by 2012. The only reason, the market would crash again is if house prices will start rising dramatically again and there won’t be a demand to meet it.

In the last 8 years, home prices did rise but mortgages were no longer given to irresponsible borrowers. In fact, In 2016, the FED stepped in and raised interest rates from 0.25 to 0.5 so that it won't turn into a bubble.

By 2019, interest rates were at 2.5 per cent. Borrowing money became expensive, although the number of mortgages dropped to a certain extent, the demand was still there so prices kept rising.

Covid-19: The crises that suppose to crash the housing market When the pandemic stopped the economy, it was clear that the housing market is going to crash because overnight millions of people lost their jobs which means, they won’t be able to continue making their mortgage payments and default on their mortgage.

Which means, suddenly there are going to be too many houses in the market as it was back in 2008 so home prices will start falling which means the housing market will crash. But what we didn’t take into account is that the Fed just recently went through a housing crash so it knew how to stop it.

First of all the government distributed stimulus checks to help everyone to pay the bills. The government granted financial aid to businesses who retained their employees so most people could keep paying the bills, including their mortgage.

And to seal the case, the government introduced a forbearance plan which means, you can put your mortgage payments on hold until 2021. And that means that non one is going to default on their loan this year, and by the next year, a vaccine is hopefully will be available and everyone will get back to work and keep making their monthly mortgage payments.

Why in the middle of a pandemic, home prices are still rising?

Remember, at the beginning of the article we talked about How the fed lowers interest rates during recessions to help stimulate growth. Well, that’s exactly what they did. The fed lowered rates to 0.25 per cent which made borrowing money more affordable so the demand for homes rose while the supply didn’t. Is the market overvalued? Probably!

But it's not a bubble. Once the 2020 rollercoaster will end and life will get back to normal, home prices may depreciate to what they worth, but that might not happen next year. Of course, if you take individual cities like San Franciso, New York City, or LA, home prices might be slightly more overvalued.

But that’s pretty much about. it. So, is it a good idea to invest in real estate now? Probably no since the market is slightly overvalued and a correction might happen next year, on the other hand, timing the market isn’t a great idea either, especially the housing market since house prices don’t jump up and down like stocks so you might end up waiting a few more years.

And now it's your turn, do you think we are in a bubble? Will home prices crash next year?

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