10 Warning Signs That Indicate If the Housing Market Is Crashing

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For a homeowner or a buyer, the thought that the housing market might be crashing is pretty scary — the last thing you want is to be responsible for an enormous, overvalued asset while the economy is crumbling. But sometimes, the housing market can remain strong while the overall economy is suffering, and vice versa.

So how can you tell if the housing market is crashing? Here are 10 warning signs.

housing prices plateau when the market is crashing
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1. Home prices are plateauing after long periods of rapid acceleration

When the price of homes plateaus after growing consistently year-over-year, it could serve as a warning sign of a housing market crash.

Land is an appreciating asset because there’s only so much of it (and not all land is buildable). The price of homes (including the land) usually increases by about 4% per year.

When home prices level out or plateau, it affects home appreciation as well as the real estate sales market. Sometimes when enough sellers are unable to find a buyer for their homes, they will lower the price in order to attract more buyers.

If you are unsure about how prices have changed on a national level over time, the Case-Shiller home price index is available on the St Louis Federal Reserve website and shows the change in home prices since 1987.

2. There are a lot of risky mortgages in the market

Another sign that a housing crash may be imminent is when we start to see lower credit standards and riskier mortgages expanding in the market. If lenders loosen up underwriting standards too much, these higher-risk mortgages can trigger a housing crash because they could be offered in bulk to buyers who can’t actually afford the homes, or for home sales where the properties are priced higher than their market value.

Prior to 2007 and 2008, many lenders handed out subprime loans and limited documentation loans to risky applicants, which ended up fueling the Great Recession. The Dodd-Frank Wall Street Reform and Consumer Protection Act established more mortgage regulation and ended many of these high-risk practices that led to the housing bubble. Lenders had to increase lending standards, some of which included the requirement for increased verification and documentation requirements for the borrower’s ability to afford the home, higher credit scores, or larger down payments.

On the flip side, when lenders start loosening up those standards to accommodate too many higher-risk borrowers, it could lead to a situation that triggers a housing bubble (i.e. artificially inflated home values) followed by a housing market crash. This is why it’s important to educate yourself about lending requirements, especially higher-risk mortgage loans.

Debt plays a big part in the housing market crashing
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3. A lot of loans originated require mortgage insurance

We used to hear that the standard down payment on a home was 20%. However, many buyers are unable to put down that large an amount. Mortgage insurance (or private mortgage insurance for conventional loans) is required for borrowers who are considered riskier because they do not have a 20% down payment.

When homeowners who lack large savings purchase a home, they can potentially experience a higher amount of outstanding debt than what the home itself is worth, leaving them with negative equity. This is especially risky when homes are being overvalued, which is what happened back in 2008.

4. Interest rates start rising

An ongoing trend of rising interest rates can also be an indication that the housing market is about to crash. Lenders compete with one another, using current interest rates to attract buyers, among other factors. Since they utilize similar metrics to calculate interest rates, lenders’ rates will often correspond with one another.

When mortgage interest rates go up, buyers suddenly can’t afford to pay as much for the house itself, which means sellers might have to lower their prices in turn. If you understand how interest rates work on a mortgage, you will be better able to expect what’s coming next.

There are more houses for sale during a housing market crash
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5. There are more houses for sale

Brad Page, who works with 82% more single-family homes than the average agent in Savannah, Georgia, believes that “one of the biggest [signs of a crash] is inventory.”

The monthly “supply” of houses calculates how long it would take for all the homes currently listed on the market to sell at the current rate of demand.

In a healthy or balanced market, the supply is about six months. If the months of supply are fewer than six months, it means that it’s probably a seller’s market. In a buyer’s market, you will see more than six months worth of supply.  It’s a simple matter of supply and demand.

If the supply of properties on the market is increasing, but the demand is not, that’s a significant sign that there are more sellers than buyers and the market is about to shift.

6. People aren’t feeling confident about buying right now

One of the weird things about the economy is that it’s a self-fulfilling prophecy — if people think that the housing economy is not going well, there’s a good chance that the housing market could tank. General consumer sentiment is quite indicative as to whether or not it’s a good time to buy or a good time to sell.

You can stay up-to-date on how consumers are feeling about housing by checking in with Fannie Mae’s monthly consumer sentiment survey, which asks consumers if they think it is a good time to buy or sell a house, and why. When consumers feel confident about the future, they are likely to buy more, which boosts the economy.

To gauge whether it’s a good time to buy, take a look at consumer “mood swings” over the course of four or five months. During a housing market crash, consumers are likely to think it’s a bad time to sell but a good time to buy because homes will be undervalued. When the housing market is booming, consumers are more likely to say that it’s a good time to sell and are also more likely to be ambivalent about whether it’s a good time to buy.

Your mortgage lenders might not be as confident if the housing market is crashing
Source: (Andrea Piacquadio / Pexels)

7. … And neither are mortgage lenders

Most of us need a mortgage to buy a house, so if lenders aren’t feeling optimistic about the housing market, that’s also a good sign that it could be headed for trouble.

You can stay up-to-date with how lenders are feeling, what they are currently doing, and the nature of their market expectations by checking in with Fannie Mae’s quarterly lender sentiment survey, which tracks lenders’ expectations about their profit margins, mortgage loan demand, and mortgage refinance demand.

The survey highlights at the end can be most illuminating, although keep in mind that this is quarterly data, so depending on when you’re looking at it, the situation might be outdated. For example, the lender sentiment survey released on March 12, 2020, stated that credit underwriting standards were stable and that lenders expected high volumes of mortgage loan demand; by April 13, 2020, JP Morgan Chase increased its mortgage loan standards to a minimum 700 credit score and minimum 20% down payment.

8. In fact, neither are agents or builders

You should also consider real estate agents when you’re thinking about professionals who can warn you when the housing market is about to crash. Agents are poised to see issues on the ground as they emerge, so their feelings and confidence on the state of things can be telling.

As far as builders go, Page says to keep an eye on price reductions. “Builders [are] usually pretty on top of things going into the summer season. They typically raise prices going into the selling season. If you start seeing them taking reductions, then that’s a sign that they’re nervous about where things are going.”

Foreclosure is more prevalent when the housing market crashes
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9. Foreclosures are up

It’s not good when people can’t pay their mortgages and foreclose on their home, but when it happens at scale, it can mean a housing market crash is near.

A foreclosure happens when the owner of a home stops making mortgage payments, which causes the bank to take back possession of the property and put it up for sale at auction. To put things into perspective, during the 2008 housing market crash, there were more than 3.1 million foreclosure filings. This means that 1 in every 54 households in the U.S. received a foreclosure notice.

There are numerous websites that can help you stay abreast of foreclosure trends and statistics, such as RealtyTrac, that you can continue to check.

Begin by looking at foreclosure filings and foreclosure activity. This tells you whether foreclosures in the United States are up or down; the number of foreclosures is usually somewhere between 45,000 and 60,000 total foreclosures each month. It’s a good idea to then compare your state’s foreclosure number to the national number.

Local markets don’t always correspond with the national market. They may show a decreasing foreclosure rate, while the country is seeing an increasing foreclosure rate. You can compare this month’s foreclosure rate to that of last month and last year to get a better idea of where we are headed. An increase in foreclosure rates is often indicative that people are struggling financially and an area is more vulnerable

You may also want to check out ATTOM Data Solution’s Home Equity and Underwater Mortgage Report. This looks at the loan-to-value (LTV) ratio of properties at the state, metropolitan statistical area (MSAs), county, and ZIP code levels.

When the LTV is more than 100%, it means that the property owner owes more than the property is worth. If you see an LTV of 125%, this means that the homeowner owes 25% more than the house is worth. Homeowners who fall into this category are considered to be “seriously underwater.”

A property owner is equity-rich with an LTV of 50% or below; this means that the property is worth double (or more) than the amount the homeowner still owes on the loan.

10. There’s trouble in the economy as a whole

The housing market isn’t simply a big, national entity — housing markets are intensely local.

“We find it’s neighborhood by neighborhood,” says Page. There can be huge variation even from block to block. You have to take your assessment down to a more micro level of the particular neighborhood in which you’re looking.

But while housing operates somewhat independently of the economy as a whole, it does not exist in a vacuum. If people lose their jobs due to a recession and can’t pay a mortgage, that’s going to have ripple effects across all corners of the economy. At some point, there is going to be a correlation with housing.

“The more jobs that are out there, the more free-flowing that cash is, then the better it’s going to be for the housing market as well as the rest of the economy,” says Page.

Keep an eye on the market to see if the housing market crashes
Source: (Rido / ShutterStock)

So is the housing market crashing?

It can be scary when you see one (or more!) of the above signs, and you may understandably worry that the housing market is on the verge of crashing.

However, it’s important to remember that the existence of one of these signs isn’t usually an enormous deal. It’s when you see multiple signs in a short period of time that it may be a good indication that the housing market could be about to collapse.

When all is said and done, you must ask yourself several questions: Are homes still selling in your local market? Are prices rapidly changing? Are a lot of people attempting to sell quickly? Are there a lot of foreclosures?

Answering these questions can help to give you an idea of how the housing market in your area is doing, but there is no perfect formula to predict whether or not a housing crash is on the horizon. If you’re not sure what you’re seeing in your own market today, an experienced local agent can help put your questions into perspective.

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