Right now is a critical time in real estate.

Since the pandemic, dynamics within our housing markets have been under a lot of pressure. The price of homes has risen dramatically and inventory remains extremely thin. Mortgage rates have also substantially increased, and they’re expected to rise further throughout the second half of 2022. Homeowners are undecided about selling for fear of not finding another home to move into, and buyers have found it nearly impossible to affordably secure a property.

Research by the National Association of Realtors indicated that the median price for homes sold in March 2022 was $375,300 compared to data from the previous reporting period when the median price was $350,300.

“Sellers and buyers are finding it extremely difficult to find a property as they’ve been hit by an unprecedented halt to available inventory and the recent spike in the prices of homes.”

Will another crash happen as in 2008?

The financial crisis in 2008 was considered to be the most significant economic event since the Great Depression of the 1930s. The Financial Services Modernization Act of 1999 (Gramm-Leach-Billey Act) and the Commodity Futures Modernization Act deregulated the financial system which allowed banks to invest in housing-related derivatives.

The Great Recession caused a huge drop in the housing market, which has taken many homeowners years to recover from.

Two years prior to the 2008 financial crisis, housing prices began falling for the first time in decades. This deflationary period in our economy welcomed new homeowners, rewarded real estate sales professionals and the real estate market became a hot trend. Many realtors applauded not taking into account the creditworthiness of new homeowners and the risky practices of lenders.

For instance, the Fed has twice lowered the rate to a range of 0.25 percent or less. Data shows that the first time was during the financial crisis of 2008 – further detailing that the Fed did not continue raising rates until December 2015. The second time was in March 2020 as a result of the global pandemic.

Investors and economists are seeing some similarities in the market today to those we saw in 2008, and wonder if another crash is on the horizon.

Researchers at the Federal Reserve Bank of Dallas warn of a coming crisis as this is the longest period of low-interest rates in U.S. history.

“Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s,” a group of Dallas Fed economists wrote in a widely cited report released in late March. “Reasons for concern are clear in certain economic indicators — the price-to-rent ratio, in particular, and the price-to-income ratio — which show signs that 2021 housing prices appear increasingly out of step with fundamentals.”

While many economists believe that the U.S. housing market is in a bubble-like stage, the Fed does not think that there will be another housing crash like the one that happened in 2008.

“Reasons for concern are clear in certain economic indicators — the price-to-rent ratio, in particular, and the price-to-income ratio — which show signs that 2021 house prices appear increasingly out of step with fundamentals.”

There are numerous signs that indicate that the housing market is about to pop. First, we have witnessed a severe lack of inventory. Additionally, appreciation in home prices is so high that it’s affecting some rural and almost all metropolitan areas. Most recently, the real estate market is being shaken by inflation and hikes in interest rates, making it harder to purchase or refinance a home.

Gigantic Increases to Home Prices

The price of homes has increased dramatically in recent years, impacting how home buyers and sellers trade real estate. Generally, the price of a house is affected by a number of factors. The main one is the demand for housing in that area. Oftentimes, a need arises due to work, and the desire to be close to family and friends. If there’s a shortage of housing, the price of houses increases.

Lack of Housing Supply

One of the biggest fears among homeowners is whether they will be able to sell their existing home for enough money to finance the cost of purchasing a new one. In addition to that, since the start of the pandemic, the housing market has experienced a shortage of new construction development. This shortage of new homes prompted many homeowners to avoid going on the market. A lack of inventory and rising home prices have ultimately made it difficult for people to find a home that they can afford. Other factors that affect the price of a house are interest rates and inflation.

Hikes in Interest Rates and Inflation

In March 2022, the Fed announced that they will be incrementally increasing rates by 0.25 percent. Borrowing rates have risen due to this interest rate change, which has led to an increase in borrowing costs for both consumers and businesses. The decision to raise interest rates was anticipated but the timing of it caught many homeowners by surprise.

Many Americans have already started to feel the effects of inflation and interest rates. Housing prices have increased over the past couple of years, but have slowed down in the last quarter. However, the cost of living is on the rise.

What Does the Future Hold?

Since the housing market is experiencing a massive boom, it’s only a matter of time before the bubble pops. If it does, it will cause a severe economic crisis. Some people believe the U.S. is headed toward hyperinflation due to past and possible future government stimulus behavior.

As the current economy is very different from the one that we saw during the Great Recession, there is some difficulty in accurately predicting what the future actually holds. But the fact that we’ve been through a depression and severe recession before tells us that there are some things that we can learn from our past experiences.