If you are shopping for a new home, or if you are trying to sell your home, you have probably noticed a dramatic price increase over the past year. According to real estate website Redfin, over half of all homes on the market today are selling above their listing price. Inflated home prices have led some economists to declare that the United States is in another housing bubble, and that a housing market crash, like the one witnessed in 2008, could be the next economic domino to fall during the pandemic. While we cannot say for sure whether a housing market crash will happen, the retirement phase experts at Crash Proof Retirement® have a few ideas about what may be causing inflated housing prices, and how you can plan for a safe retirement in this environment.
What is Causing Inflated Housing Prices?
There are several factors that contributed to the increase in home prices over the past year:
- Low Interest Rates – The Federal Reserve has kept its benchmark interest rate at record lows throughout the pandemic, making it cheaper for banks to borrow money from one another. This move has kept mortgage interest rates low, giving homebuyers easier access to credit. It seems this strategy may have worked a bit too well. Low interest rates propped up the stock market by making cash more easily available and contributed to a rapid increase in consumer demand for new housing in a market that is facing massive shortages that are driving up the cost of new homes.
- Resource Shortages – As mentioned before, benchmark interest rates as low as 0.25% created a home buying frenzy, and the COVID-19 pandemic proved to be a strong motivator for Americans looking for a change in scenery. Homes in desirable markets are in short supply, and that has sent prices skyrocketing. At the same time, a labor shortage combined with supply bottlenecks and wildfires have caused the price of lumber to increase substantially, making it more difficult for laborers to build new homes.
- Fed Purchasing Mortgage Bonds – Since March of 2020, the Federal Reserve has bought more than $982 billion in mortgage bonds, and they have plans to continue purchasing $40 billion each month for the foreseeable future. This purchasing program was aimed at stabilizing the housing market during the pandemic, but variables like unexpected resource shortages have threatened that stability by steadily increasing the price of housing.
- Investment Companies Buying Houses – At present time, it seems that no matter how high housing prices go, institutional investors are more than willing to outbid average homebuyers. While their end game is unclear, private equity firms are buying up tracts of housing, even entire neighborhoods in some cases, at prices significantly higher than their listing price.
What Happened to the Housing Market in 2008?
In this hot housing market, economists and pundits alike have commented on the similarities between today’s conditions and the events of 2008 that led up to the Great Recession. From September 2007 to December 2008, the Fed’s benchmark interest rate ranged from 0.0% to 0.25% — almost the same conditions that we see today. Currently, similarly low interest rates have fostered an active housing market; however, unlike today, the buying boom of 2008 was predicated on less than spectacular lending practices. Lenders were doling out cash like Halloween candy and many home buyers were given loans they could not afford. When millions of those loans defaulted, it created a subprime mortgage crisis that crashed the stock market and nearly sent the economy into another Great Depression. American homeowners lost a cumulative $3.3 trillion in home equity, and investors lost over $10.2 trillion during that period.
While some of the same conditions exist in 2021, more ethical lending practices make it less likely that we will see a housing crash of the same magnitude. That does not mean you can rest easy, especially if you are in or near retirement. The housing market has shown a propensity to evolve rapidly in the past, and any number of factors could send housing prices crashing once again. Traditionally, the Fed has cut interest rates and increased the money supply during economic crises, but with rates already near zero and the national debt at higher levels than we have seen since World War II, they will have few tools left to combat a recession, or worse, in the future.
If you are invested in stocks, bonds, and mutual funds, a housing crash could send your investments plunging along with it. For those concerned about the possibility of a market crash in the future, there are safe investment alternatives that exist outside the stock market.
The Exclusive Crash Proof Retirement® System has protected more than 5,000 retirees from stock market crashes. If you would like to find out more about how the proprietary Crash Proof Vehicles can protect your retirement from a housing market collapse, get in touch with one of our licensed retirement phase experts at Crash Proof Retirement® today. Call 1-800-722-9728 or visit crashproofretirement.com where you can fill out our online contact form to receive more information about the Crash Proof Retirement® System and listen to the voices of real Crash Proof Consumers about how they protected their nest eggs from the fees and volatility of Wall Street.