The real estate market has proven time and again that making predictions is a fool’s errand. While there are markers that indicate how the market is doing and what might happen in the near future, it is impossible to take everything into account. There is always potential for another crisis to come along and change everything we know.
We’ve seen this with the COVID-19 pandemic. Some experts assumed that the pandemic would decimate the housing market. After all, in a difficult economy with millions of people losing their jobs along with stay-at-home orders, the demand for housing was expected to plummet.
For a few months, house prices did indeed decrease, but they recovered quickly and since mid-2020 have been skyrocketing. We are now seeing houses sold at higher prices than ever before, which, of course, leads to the fear that another crash is imminent.
People are comparing the current housing market to that of the early 2000s. But is that a fair comparison? Here are some of the reasons that such comparisons will lead us nowhere.
Excess Supply vs Excess Demand
In the early 2000s, the housing market was booming. People were willing to pay inflated prices for houses because it seemed like a market that would continue its upward climb. There was so much demand for housing that a crash seemed impossible. However, this led to people and companies building at an excessive rate.
Eventually, there was so much excess supply that housing prices plummeted. The bubble burst and the market crashed. Overenthusiasm about the housing market led to far too much construction.
Today’s high prices have been driven by very different circumstances. During the pandemic, construction slowed tremendously. People ready to sell their houses decided to stay put. This led to a severe lack of supply while demand rose once again. There are still not nearly enough homes available as construction is still far from reaching pre-pandemic rates. There is a fair amount of demand, but we are nowhere near having excess supply.
One of the similarities between the housing market of the early 2000s and today’s housing market is the low interest rates. Then, subprime lending gave potential homeowners mortgages at extremely low interest rates, allowing people who otherwise couldn’t afford to buy homes the opportunity to buy. Today, the prime interest rate is already relatively low.
However, a major difference is that tens of millions of people have been unemployed for some of the past year and a half, with millions still searching for jobs. This means that fewer people are able to consider buying expensive homes even with low interest rates. The demand is high in comparison to the supply, but not so high that homes are going to people who could otherwise not afford them.
We can see how this would impact potential homeowners in Indiana. Even if someone is able to afford a home only because of low interest rates, homeowners insurance in Indiana is going to be expensive, considering the high prices. For people struggling to make ends meet, taking on expensive homeowners insurance is just not possible, even if their monthly mortgage payments are low.
The Danger of Predictions
At the start of this article, I mentioned that making predictions about the housing market is a fool’s errand. Because of that, the above factors should be taken with a pinch of salt. There are significant differences between today’s housing market and that of the early 2000s, but that is not to say that the market won’t crash. If it does, however, it will likely be for very different reasons.
What should be apparent is that there are always a ton of factors in play, and betting on the market is therefore unwise. You should buy a home when you need and can afford to buy, and if you think you can make money as a landlord. But do not buy simply because prices are going up. It is impossible to know when that trend will turn around, and it could happen very suddenly.
The good news is that today’s rising prices are not due to people betting on the market but to excess demand. A crash caused by the hubris of investors is therefore unlikely.
Presented By DigitalContentZone