Dear Monty: Will the real estate market crash?

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Reader Question: Some people fear another real estate market crash. We see the real estate market has recovered in many markets. We are considering selling our current home and buying or building another house. With these conflicting opinions, it is difficult to figure out whether to go ahead. Do you think the housing market will experience a significant correction soon?

Monty’s Answer: To look into the future direction of the real estate market is complicated. It is for this reason that I am uncomfortable making predictions about the course or the condition of the real estate market. This writer did not anticipate the collapse of the market in 2008. The only comfort this admonition supplies is that most people did not see it coming. Rather than predict how the market will perform, a discussion on the effects of the market moving, either way, maybe more helpful for you than a prediction.

Real estate markets move in both directions

There have been dips in home values as long as records of real estate activity have existed. The 2008 meltdown, which is the one most people remember, did not affect everyone. The homeowners that were affected were not affected equally. According to the American Community Survey (ACS) data, some groups suffered more than others. Homeowners most impacted were on both coasts, people between the ages of 26 and 34, wealthy people, and Hispanics. The ACS is a service of the U.S. Census Bureau.

People who owned homes for years, people with substantial equity, and people with regular income or other means that retained ownership of their home through the meltdown were unaffected. If some of these people live in an area that has not entirely recovered, they may yet be affected if they sell before the recovery is complete.

Perspective is important

There are different estimates as to the total number of foreclosures since 2008. One approximation that is common is “over 5 million.” Five million is a large number, especially if it were multiplied by the individual foreclosure losses, which totals over $1 trillion. The interesting comparison here is the total number of single-family homes in the United States, according to the U.S. Census Bureau is over 76 million homes. So while five million foreclosures is a large number, it represents a relatively small percentage of the total number of homes.

Additionally, consider that the American dream is to own that home “free and clear.” According to the ACS data, 30 percent of all the single-family homes are free and clear of a mortgage. Add to this information the fact that over 30 percent of homeowners with mortgages are paying over 32 percent of their income to support their loan. Finally, since the real estate and mortgage industries have been keeping track of this type of data, the annual average rate of home foreclosures typically is about one percent of all home mortgages.

A personal experience

In 1966, the value of a typical home in my hometown was about $12,500. A home site to construct a new home was about $1,500. Now, over 50 years later, and near 10 years after the meltdown in 2008, the median value of a home here is nearing $175,000, and a typical home site is about $40,000. In the past, other factors outside a consumer’s control also impact housing. Interest rates, the overall economy, regional upswings and downturns, inflation, and other factors. The price of a house has steadily trended upward, despite the bumps, for over 100 years.

Our lifestyles and circumstances

It is easy to see that many factors come into play and all of us have different circumstances. Do we hold secure jobs? Are we constantly saving? Do we live within our means? Can we stay healthy? Do we live in areas that experience accelerated housing prices?

The effects of changes in the housing market

If home values rise your net worth increases and if home values fall your net worth decreases. In the situation you describe, were you to sell your home now in a healthy market, and the market makes a downturn soon, you may be able to buy or build your new home in a more favorable buying climate. If the market stays strong and no recession appears, the new purchase will offset your gain in the old house.

Your decision is more related to your judgement of your personal situation than the condition of the market.

— Richard Montgomery is the author of “House Money – An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He is a real estate industry veteran who advocates industry reform and offers readers unbiased real estate advice. Ask him questions at DearMonty.com.

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