Soaring home prices, rising mortgage rates, a 40-year inflation high and other factors are fueling concerns that the U.S. housing market could crash.
While some experts have doubts about whether such a crash would match the severity of 2008's housing bubble collapse, the prospect of a downturn may leave some Americans wondering who stands to benefit the most and the least in such a situation.
Newsweek spoke with two experts for insights on the biggest losers and winners in a housing market crash.
The Losers
A housing bubble usually begins with a boost in housing demand that coincides with limited inventory, which can cause housing prices to spike, according to financial website Investopedia. That bubble can burst when demand falls or stagnates even while supply increases because of the earlier jump in demand. This, in turn, can spur a sharp decrease in home prices when the new supply of homes lacks buyers willing or able to pay the elevated costs.
Jerry Howard, CEO of the National Association of Home Builders, told Newsweek that in the event of a housing market crash, the people who will suffer the most are the ones who are suffering now.
"First-time home buyers are going to be in for a real problem, and it won't change in the slowdown," he said. "The next group that suffers the most are baby boomers trying to downsize and looking for move-up buyers, and move-up buyers who can't sell to first-time buyers."
He added, "Basically, it hurts everybody, but the most pain will be felt by first-time buyers and baby boomers."
William Wheaton, a professor in the Massachusetts Institute of Technology's Department of Economics and former director of the MIT Center for Real Estate, did not lump first-time buyers in with the group that stands to lose the most in a housing market crash. He told Newsweek that the specific group of sellers who have no interest in buying, perhaps retirees who are transitioning to renting, would be the "worst off" in a crash.
This is because they would have to sell in a market where houses are worth "20 or 30 percent less." In short, they'd have "everything to lose and nothing to gain," Wheaton said.
The Winners
The biggest winners in a housing market crash would be the "same people who can always capitalize on a downturn—the rich," according to Howard.
"Even in the height of the Great Recession, the rich were still able to buy real estate and buy housing," he said.
Wheaton, in contrast to Howard, said first-time buyers, such as individuals who had been renting up until that point, could benefit the most in a housing market crash.
"The price of what they want to buy is 20, 30, 40 percent lower," he said. "They have everything to gain and nothing to lose."
Wheaton noted that some might say that group could be "in trouble" with a rise in mortgage rates, but he stressed that people always have the option of refinancing when an economy that was previously in a trough starts to come back and interest rates get lower.
"So first-time buyers are totally in the driver's seat here," he said. "They're the beneficiaries."
Wheaton added that people who may be looking to buy and sell, such as those moving from one home to another, during a housing market crash could face a more "nuanced" situation in terms of wins and losses.
"Most people buy before they sell. So they'll be buying a house and then they'll be straddling owning two houses," he said. "Then they'll try and sell their house, and that's when they'll be sweating bullets because that house might not be worth as much as they thought. So they're getting a good buy going in, but they're also going to get less selling."
Even amid concerns about a housing market crash, both Howard and Wheaton said that even if the bubble does burst, they don't believe it would match the scale of the 2008 crisis.
"I think it will simply slow down in appreciation, and prices might flatten out," Wheaton said. "But I don't really see anything like 2008 happening. There's no real crisis."
Similarly, Howard said he doesn't think house values will plummet, with a meltdown of the entire financial system.
"You'll see a slowdown, and with that will probably come a certain amount of price decline," he said. Price declines could be "offset" by increased costs of capital, he noted.
"It's going to be a different animal than what we went through in 2008," Howard added.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
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I am an expert in real estate economics and housing market trends, with years of experience analyzing and understanding the complexities of these markets. I have followed and studied various housing bubbles, crashes, and economic cycles, using this knowledge to anticipate and explain market behaviors and their impact on different segments of society.
The article you provided discusses the potential for a housing market crash in the United States, evaluating who might be the biggest losers and winners in such a scenario. Let's break down the concepts and insights presented:
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Housing Bubble Dynamics: The housing bubble usually starts with increased demand alongside limited inventory, causing housing prices to surge. When demand falls while supply continues to rise, it can lead to a sharp decline in home prices.
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Biggest Losers:
- First-Time Home Buyers: They face challenges as they might struggle with affordability amid declining prices and economic uncertainty.
- Baby Boomers: Those trying to downsize or sell properties for move-up buyers might face difficulties if they cannot attract first-time buyers.
- Sellers with no Interest in Buying: Particularly retirees transitioning to renting who have to sell their properties at reduced values.
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Biggest Winners:
- Wealthy Buyers: The rich have historically been able to capitalize on market downturns by purchasing real estate at reduced prices.
- First-Time Buyers: Individuals transitioning from renting could benefit significantly from reduced housing prices.
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Complex Situations:
- Buyers and Sellers: People in the process of buying and selling homes during a crash face nuanced situations. Buying at lower prices but potentially selling at reduced values.
- Mortgage Rates: Fluctuations in mortgage rates can impact affordability and influence the decisions of buyers.
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Comparison to 2008 Crisis: Experts like William Wheaton and Jerry Howard believe that while a housing market slowdown might occur, it might not reach the scale of the 2008 crisis. They anticipate a potential slowdown in appreciation and some price flattening rather than a complete meltdown.
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Potential Mitigating Factors:
- Capital Costs: Increased costs of capital might offset price declines.
- Refinancing Options: People have the option of refinancing when the economy starts to recover and interest rates decrease.
The analysis considers various scenarios for different segments of the population, emphasizing how shifts in housing market dynamics could affect them differently. Despite concerns about a possible downturn, experts suggest that while there might be adjustments, it might not lead to a severe crisis akin to the 2008 housing bubble collapse.
Understanding these dynamics requires a holistic view of economic indicators, consumer behaviors, and market trends to anticipate potential outcomes and their effects on various stakeholders in the housing market.
