What Happens to Homeowners if the Housing Market Crashes? Insights for Homeowners and Buyers

The housing market is very fluctuating. I can understand how difficult it is for homeowners especially when they have to pay the mortgage instalments.

Actually, housing is an aspect that affects lives across the world. It involves the risks of fluctuating prices of mortgages, rising and falling home prices, changing interest rates, and increasing payments. It just gets very difficult when the housing market crashes.

I’ll explain this concept here in detail.

You Must First Understand the Housing Market Crash and Its Impact

The phenomenon of the housing market crash can be explained simply by saying that it is a result of demand and supply irregularity. When the housing prices decrease, the number of houses that are being sold and bought decreases.

The supply is basically exceeding the demand. Sometimes, when there are higher monthly payments, there is increased defaulting which also affects the property values.

Although, it seems like one spectrum of life, when we see deeply we will realize that the entire economy comes under a crunch when there is a housing crash. So, let’s see how the construction work reduces, the activities cease because the buyers decrease.

Now, since the buyer’s market has reduced, the reliability factor has reduced and the banks have problems in lending money.

On another level, this literally equates to a general decrease in how much consumers are spending in the real estate market. As a result, the economy slows, which further leads to job losses, inflation rate, and other difficult phenomenon.

I’ll Tell You the Factors that Determine the Housing Market Crashes

Although there is a tumultuous market scenario, sometimes home price growth is sudden other times it suddenly falls down. Let’s see some factors that impact the market.

1. Inventory of Houses

As a general rule, when the available number of homes in the market is very low, compared to the buyers in the market; there is a competitive setting created. This leads to higher prices.

When we see the vice-versa situation where there are many homebuyers but the available homes are way more than that, so the increase in options puts downward pressure on the buyers.

This way, if the market is flooded or does not have an overflowing inventory can be a good deciding factor to determine a possible housing market crash.

2. Lending Standards

When the lending standards are very tight and strict, it helps prospective buyers who actually want to buy houses. The number of people with actual buying power is less so the number decreases, which eventually leads to decreased prices.

Now, given the lending standards are not too high, it will lead to excessive lending, which will automatically improve the market conditions and increase prices.

3. Demographic Trends

When the demographics of a place change, there is a huge impact on the market, that stays for a prolonged period. The present population might be in an age bracket that does not have enough money allocated for buying homes.

So, in the foreseeable future, they will actually fall into the category of home buyers, thereby increasing home sales and helping the overall economy.

Mortgage Rates Can Drop- I’ll Tell You Why

There are a lot of reasons that could impact the mortgage rates, macroeconomic as well as microeconomic. Let’s start with the most basic cause, employment.

• If the employment sector is strong, it will allow lenders to make timely mortgage payments at decent costs, as the lenders have faith and can lend easily.
• When the employment sector becomes weak, then people are losing jobs here and there, and mortgage lenders become reluctant in such a scenario.
• The interest rates increase and so do housing values, which leads to decreased consumer spending and pent-up demand.
• Similarly, when we consider the housing market as a whole.

So, given the scenario that there is a very high demand. The prices are accordingly rising, and the lenders increase the mortgage rates thereby increasing the borrowing costs and all this leads to positive growth in the economic activity of the housing market.

But, if the demand record lows, the whole market slows down, and the lending rates further decline, this way it directly impacts the mortgage.

What Happens to the Homeowners if the Market for Housing Crashes?

If the house prices decrease very abruptly it will put the homeowners in underwater mortgages. So, when such a situation arises, either they stay in their houses until the market regains stability or they might have to sell and claim losses and lose money.

The mortgage for most homeowners is more than what their houses are worth. However, they can not move to a new house until they have extra disposable income to make the huge payments for the new investment. This eventually leads them to file for bankruptcy as they lose their homes.

However, there can be another side to this story too, given the period has lasted long enough. You will find that the housing demand will eventually increase that is because the housing market crashed and the property prices decreased, to get out of the housing bubble.

This becomes possible because homeowners now get adjusted interest rates because the lenders also want them to get out of their housing bubbles. So, they help an overall decrease in home values to get the market running again.

Eventually, with all such activities, the economic downturn is maneuvered, the stock market rebounds and the banking industry regains faith. This helps with the mortgage rate to help the broader economy and eventually, we see the housing bubble burst.

This is also what happened in America in the years that followed the housing market crash in the late 1900s until the 2000s.

So, What Should Homebuyers Do?

Primarily remember, this a cycle the housing market will follow a series of ups and downs over time.

If you are a prospective buyer, keep looking for good opportunities, and do not settle quickly on the first few options. See the construction industry proceedings along with a good inventory check.

If you are not buying a house right now, then the only thing you need to keep in mind is to maximize your savings. Building a strong credit holding and getting a good financial advisor to guide you throughout the process.

Last Updated on May 21, 2024 by Pragya