Are we headed for a housing market crash? A look at past housing bubbles and future trends.

If I had a dollar for every time I heard “I’ll buy a home when the housing bubble pops,” I would have had a much easier time reaching my millionaire status. Sad part is, all those people that have been waiting for this “inevitable” housing market crash for the past ten years are still house-less. 

I have these questions myself. As you know, I have bought a lot of houses, and every time I do, I get to wondering if we are in a housing bubble and ready for a housing market crash. Then I remember I have a process for this and stop stressing about it. I’ll teach it to you today and show you if we’re in a bubble now!

Whenever you’re buying something, it’s natural to question if it’s about to go on sale. This is especially true if you are a super saver like I hope you are! But compound that with financial news always blaring away something alarming – that markets are either ready for collapse or ready to skyrocket and you’re constantly left waiting for things to calm down. (Nothing is ever “just fine” in the news).

Then with housing, you add on top how big those numbers are and you have a perfect storm for a housing bubble and housing market crash worries.

So how do you know if you are in a housing bubble, are we in one now, and what do you do about it either way?

Read more about Real Estate Investing

What causes housing bubbles?

Rising home prices have been great for homeowners for the past year. So great that many now fear a housing market crash based on the belief that it is a bubble. According to the S&P CoreLogic Case-Shiller National Home Price Index, prices are finally above their 2006 peak, but that doesn’t exactly mean we’re in a bubble. That peak was 15 years ago!

Let’s first look at what a housing bubble is and what causes them. A housing bubble is when the prices of the property rise to an ungodly amount and eventually lead to a price drop. 

Two factors can cause this rapid price increase:

  1. A rapid increase in demand for homes (sometimes for living, sometimes for investing speculation.)
  2. A drop in the supply of homes available for sale. 

In the past year, we have had both scenarios play out simultaneously.

The increase in home demand came as people needed some space. After the pandemic started, your home became your workspace, your classroom, and your place to have fun. And multiply that by the number of people you live with! Needless to say, if your family was happy with a tiny abode pre-pandemic, that space quickly became insufficient. 

Simultaneously, homeowners weren’t looking to invite people into their homes for viewings during a pandemic, so they decided to take their homes off the market, resulting in home sales plummeting. Hellooo housing bubble. 

In my own neighborhood, homes are selling at record prices while friends who were considering selling are all deciding to “wait out the housing bubble” as they say. 

Real estate cycles

Real estate generally operates in cycles anyways. It’s common for real estate boom cycles to exist and eventually to turn into a housing market crash. No one knows when a market will crash or how inflated it is, but one thing’s for sure – it will crash some day. 

However, those housing market crashes usually happen with greater economic crashes where unemployment starts to go up, incomes and savings start falling, interest rates start rising, and demand overall is non-existent.

On the flip side, the opposite scenario happens when the real estate cycle is moving upward. Like the current economic environment, the Federal Reserve guides that rates are likely to stay low for some time, the economy grows fast, unemployment is estimated to be very low, and demand for real estate may cause a shortage of construction workers. Hardly the scenario of a looming housing market crash! Right!?

Historical housing bubbles

Looking at historical pricing trends can help gauge how overvalued the market may be and if a housing market crash is imminent. Just because prices are reaching levels last seen 15 years ago should not alone cause alarm. Look at the reasons behind the change.

In the early ’90s, the economy wasn’t that bad, but factors such as distressed leverage on excessively built properties fueled by wrong tax policies, leading to a housing market crash that did not start recovering until 1998.

During the Great Recession in 2008, low-interest rates did play a role in excessive lending. However, the major problems were lax loan standards at almost no down payments that spurred speculation that prices will continue to rise to infinity, and borrowers that shouldn’t have been given even a single mortgage were taking on four or five mortgaged properties. 

The incentives were wrong for everyone. Loan originators paid fees to underwrite more and more loans regardless of credit quality, banks’ lending to subprime borrowers, and then packaging the loans to sell them off to investors looking for decent returns in a low-rate environment.

Are we in those situations? No, every housing market crash is unique but at least currently, all the signs are pointing in the right direction. 

What state does the housing world seem to be in now?

Today’s housing market conditions are quite different compared to those that led to the housing bubbles in the 1990s and 2008.

People’s jobs may be the reason. There have been shifts in how businesses operate. After being forced to experiment with working from home during the pandemic, companies now see it as a reasonable alternative to expensive office space. 

Also, people stuck at home and realizing that their living spaces are too small and no longer need to be close to their offices in urban areas have started to venture out to suburban markets. That demand is starting to be met. Single-family home starts are already exceeding pre-pandemic levels.

However! Not all is in the clear. Whenever any market is reaching new highs, the four most dangerous words are “this time is different.” That means be cautious. After a certain level of increase, it can be hard to justify prices. One good measure is to gauge home price in relation to personal incomes. Look at that chart below; those trends do look ominous.

Another measure is home prices relative to rental yields. That chart, too, does not bode well regarding a housing market crash.

In some metro areas, home prices are rising while rents are falling. This usually should not be the case because the same variables driving up home prices drive up rents in an area unless a housing bubble is forming.

As a result, mortgage rates have also started to bounce back up.

At this point, we don’t know if the economic problems caused by covid will start to ease up or stay the same. 

Likely, a bunch of people will keep on working from home. Not only that, they’ll also shop from home, entertain from home, basically making a house life’s epicenter. The pandemic was a change agent, and more funding is going to be invested in homes to be more available and hospitable to people’s needs.

What would cause a housing market crash in 2021?

So above you can see, prices are high when compared to basically anything. In my mind that means we are in a housing bubble but it does not mean there will be a crash any time soon.

So what would cause a crash? 

  1. If the Fed raises interest rates quickly it would cause a crash. But they aren’t stupid so that will be well controlled (unless there is hyper inflation but that’s a whole different unlikely story).
  2. A big recession on everything. This would be bad but as it stands things are on the up and up and while the government keeps stimulating the economy, it’s probably not crashing.
  3. Supply changes. This is the one I think will change the housing market (someday). I don’t think it will change in 2021 and won’t hold my breath in 2022 either. People (like my neighbors) aren’t listing their houses because of covid chaos. Once things feel normal, they probably will and the supply and demand balance will turn the wrong way.

Overall, I don’t think those things will happen soon (I guess 2023), but houses are certainly expensive now.

What should you do about a housing bubble in 2021?

  1. Don’t buy into speculation. Bad investors let their emotions gain control of them.
  2. Keep buying rental houses with good numbers. You don’t know when the market will crash, but if you have a house that is cash flow positive it doesn’t matter anyways.
  3. If you are buying it for yourself, buy something reasonable. Don’t get caught up in the mania. I always recommend buying a house way beneath your means.
  4. Don’t get in over your head. When investing in real estate, you can leverage really aggressively and fly pretty close to the sun. Or you can hold off a bit (maybe 1 less house in a portfolio, or 20% down instead of 10% down). When prices are high I recommend still investing but a little more conservatively. Then there is some gas in the tank if there is a collapse. I would prefer to neuter my gains a little bit than go bankrupt. That’s for sure.

What does that mean for me? I thought about selling my rentals. I didn’t.

I’m in the market for an apartment building, but I’ve dropped my sights from a 30+ unit to a 8+ unit building. Then I can sleep at night knowing the numbers work out pretty easily no matter what happens.

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2 thoughts on “Are we headed for a housing market crash? A look at past housing bubbles and future trends.”

  1. I was predicting the bubble starting to deflate in 2025 based simply on the timing, as housing bubbles seem to pop on a regular basis (about every 18 years). 2012 was the last low, add 18 to that we get 2030 as the next low. Price began falling in about 2007, add 18 we get 2025. So prices will peak around 2023 – 2024 ish, start falling 2025 and hit bottom in 2030. My two cents.

    • That’s a fun metric that lays in with my expectations (coincidence?? or maybe we have discovered the mystical key to timing the market 😛 ). I guess 18 years is roughly 2 stock market crashes, which maybe makes sense that every other crash brings housing down with it.

      Where I live we skipped the 2009 housing market crash so I think we are well beyond due for our 18-year correction. It might be all the way back to the 80s to see a >20% drop but I’ll fact-check that another day. 🙂


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