Is the Real Estate Market Going to Crash? | Grand Rapids relocation
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Is the Real Estate Market Going to Crash?

While many areas of the economy have contracted, the housing market has stayed
remarkably strong. But can the good news last?

When COVID-related shutdowns began in March, real estate brokers and clients scrambled to
respond to the shift. Record-low interest rates caused some lenders to call a halt to new
underwriting, and homeowners debated whether or not to put their houses on the market.
However, those first days of uncertainty ushered in a period of unprecedented demand in the
U.S. real estate market, which ended the year with increasing average home prices (up 13.4%
from the previous year) and shrinking days on market (13 fewer than in 2019).

Now, as the spring market approaches, you may be wondering whether the good times can
continue to roll on. If you’re a homeowner, should you take advantage of this opportunity? If
you’re a buyer, should you jump in and risk paying too much? Below we answer some of your
most pressing questions.

How is today’s market different from the one that caused the 2008 meltdown?

At the beginning of the pandemic, fears of an economic recession and an ensuing mortgage
meltdown were top of mind for homeowners all across the country. For many buyers and
sellers, the two seemed to go hand in hand, just as they did in the 2008 economic crisis.

In reality, however, the conditions that led to 2008’s recession were very different from those
that triggered the current downturn—and this time, the housing market is the source of much of
the good news. 2 This is in line with historical patterns, as housing prices traditionally hold steady
in the face of recession, with homeowners staying put and investors putting their money into
bricks and mortar to ride out uncertainty in the stock market.

This time around, because of lessons learned in 2008, banks are better funded, homeowners
are holding more accrued equity, and, crucially, much of the economic activity is focused on
financial factors outside the housing market. As many industries quickly pivoted to work-from-
home, early fears of widespread job loss-related foreclosures have failed to materialize. Federal
stimulus payments and the Paycheck Protection Program also helped to offset some of the
worst early effects of the shutdown.

Are we facing a real estate bubble?

A real estate bubble can occur when there is a rapid and unjustified increase in housing prices,
often triggered by speculation from investors. Because the bubble is (in a sense) filled with “hot
air,” it pops—and a swift drop in value occurs. This leads to reduced equity or, in some cases,
negative equity conditions.

By contrast, the current rise in home prices is based on the predictable results of historically low
interest rates and widespread low inventory. Basically, the principle of supply and demand is
working just as it’s supposed to do. In addition, experts predict a strong seller’s market
throughout 2021 along with increases in new construction. 3 This should allow supply to
gradually rise and fulfill demand, slowing the rate of inflation for home values and offering a
gentle correction where needed.

Effects of low interest rates
According to Freddie Mac, rates are projected to continue at their current low levels throughout
2021. 4 This contributes to home affordability even in markets where homes might otherwise be
considered overpriced. These low interest rates should keep the market lively and moving
forward for the foreseeable future.

Effects of low inventory
Continuing low inventory is another reason for higher-than-average home prices in many
markets. 5 This should gradually ease as an aggressive vaccination rollout and continuing buyer
demand drive more homeowners to move forward with long-delayed sales plans and as new
home construction increases to meet demand.

Aren’t some markets and sectors looking particularly weak?

One of the big stories of 2020 was a mass exodus from attached home communities and high-
priced urban areas as both young professionals and families fled to the larger square footage
and wide-open spaces of suburban and rural markets. This trend was reinforced by work-from-
home policies that became permanent at some of the country’s biggest companies.

Speculation then turned to the death of cities and the end of the condo market. However, it
appears that rumors of the demise of these two residential sectors have been greatly
exaggerated.

With the first vaccine rollouts, renters have begun returning to major urban centers, attracted by
the sudden rise in available inventory and newly discounted rental rates. 7 In addition, buyers
who were previously laser-focused on a single-family home responded to tight inventory by
taking a second look at condos. 8 While nationwide condo prices continue to lag behind those of
detached homes, they’ve still seen significant price increases and days on market reductions
year over year.

In addition to these improvements, the 2020 migration has spread the economic wealth to
distant suburban and rural enclaves that normally don’t benefit from increases in home values
or an influx of new investment. As many of these new residents set up housekeeping in their
rural retreats, they’ll revitalize the economies of their adopted communities for years to come.

How has COVID affected the “seasonal” real estate market?

Frequently, the real estate market is seen as a seasonal phenomenon. However, the
widespread shutdowns in March 2020, coming right at the beginning of the market’s growth
cycle in many areas, has led to a protracted, seemingly endless “hot spring market.”

While Fannie Mae’s chief economist Douglas Duncan predicts slower growth from 2020’s
historic numbers, the outlook overall is positive as we embark on the 2021 spring selling cycle. 9
Duncan anticipates an additional lift in the second half of 2021 as buyers return to business as
usual and look to put some of their pandemic savings to work for a down payment. Thus we
could be looking at another longer-than-usual, white-hot real estate market.

How will a Biden administration affect the real estate market?

Projected policy around housing promises to be a boost to the real estate market in many
cases. 10 While some real estate investors bemoan proposed changes to 1031 Exchanges, the
Biden plan for a $15,000 first-time homebuyer tax credit aims to increase affordability and bring
eager new home buyers into the market. In addition, Biden-proposed policy pinpoints low
inventory as a primary driver of unsustainable home values and is geared toward more
affordability through investments in construction and refurbishment.

Overall, according to most indicators, the real estate news looks overwhelmingly positive
throughout the rest of 2021 and possibly beyond. Pent-up demand and consumer-driven
policies, along with a continued low-interest-rate environment and rising inventory, should help
homeowners hold on to their increased equity without throwing the market out of balance. In
addition, the increase in long-term work-from-home policies promises to give a boost to a wide
variety of markets, both now and in the years to come.

STILL HAVE QUESTIONS? WE HAVE ANSWERS
While economic indicators and trends are national, real estate is local. We’re here to answer
your questions and help you understand what’s happening in your neighborhood. Reach out to
learn how these larger movements affect our local market and your home’s value.

Sources:
1. Realtor.com –
https://www.realtor.com/research/december-2020-data/
2. New York Magazine –
https://nymag.com/intelligencer/2020/06/why-this-economic-crisis-wont-be-as-bad-as-2008.html
3. Washington Post –
https://www.washingtonpost.com/business/2021/01/11/2021-housing-market-predictions/
4. Freddie Mac –
http://www.freddiemac.com/research/forecast/20210114_quarterly_economic_forecast.page?
5. Wall Street Journal –
https://www.wsj.com/articles/housing-market-stays-tight-as-homeowners-stay-put-
11611226802?mod=re_lead_pos1

6. Marketwatch –
https://www.marketwatch.com/story/new-home-construction-activity-soars-to-highest-level-in-over-a-decade-
as-builders-rush-to-produce-single-family-homes-2021-01-21

7. Forbes –
https://www.forbes.com/sites/noahkirsch/2021/01/14/signs-of-a-rebound-new-york-city-rent-prices-are-
climbing-back

8. Washington Post –
https://www.washingtonpost.com/business/2021/01/07/condo-sales-rebound-amid-dwindling-inventory-
houses/

9. Mortgage Professional America –
https://www.mpamag.com/news/fannie-mae-chief-economists-forecast-for-us-economy-housing-market-in-
2021-244045.aspx

10. Inman –
https://www.inman.com/2020/11/09/what-a-joe-biden-presidency-means-for-real-estate-and-housing/

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