Is a property market crash going to be the next Black Swan event?
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The housing market has come under intense scrutiny lately. Falling home sales and rising mortgage rates are prompting some economists to call for a cooling in real estate. Some even believe that a housing market crash could be the next black swan event that will bring down the broader economy.
A black swan event is defined as an unexpected and devastating phenomenon that affects large numbers of people and is often taken for granted in hindsight. Many refer to the 2008 housing crisis as an example of a black swan event. It sparked widespread unrest across the country and the world, and arrived at what was then the peak of housing in the United States. It is also often referred to as obvious to those who have done the proper due diligence.
By definition, a black swan event is hard to see until it happens. For the housing market, however, there are obstacles to a crash that make the event even more difficult to predict. Given the historic rise in house prices since the start of the pandemic, housing may seem like an obvious candidate for the next big black swan event. On the other hand, despite the signs of a market pullback, there remains a lot of doubt surrounding the notion of a potential crash.
Will a housing market crash be the next Black Swan event?
Housing has long been an integral part of the American economy. Real estate is a major source of national wealth, and home building employs large numbers of Americans. In fact, housing regularly contributes between 15% and 18% to gross domestic product, or GDP. As such, rumors of a real estate crash are particularly surprising to economists. If housing falls, the US economy could also collapse.
The question remains: is housing really in danger of collapsing? The answer to that varies depending on who you ask. Home prices have soared since the start of the pandemic, largely due to rock bottom interest rates and an insufficient supply of available properties. Indeed, since the second quarter of 2020 alone, the median price of homes sold in the United States has climbed by almost 40%. Currently, the median sale price of homes sold in the United States is $440,300.
Now, especially with 2008 in the rearview mirror, it’s no surprise that some have started peddling rumors of a housing bubble. But there are also major obstacles to a substantial decline in house prices.
Is a real estate recession really possible?
Perhaps the most salient argument against a housing crash is the sheer lack of housing in the United States. While housing demand is falling rapidly, which is reflected in plummeting completed home sales, the United States still only has about a three-month supply of housing. That’s a far cry from the typical five- to six-month supply of a balanced housing market.
The fundamental laws of supply and demand tell us that even though fewer people want homes, if there is still an insufficient supply of housing, the housing market is unlikely to suffer any kind of severe setback. .
Nadia Evangelou, senior economist at the National Association of Realtors (NAR), says there is little room for home prices to fall:
“Due to the housing shortage, house prices will continue to rise in the coming months. Although inventories are improving, they will remain tight as homebuilders cut production of single-family homes. The deceleration in house prices will continue. Nonetheless, home prices will likely continue to experience double-digit year-over-year appreciation in August.
That said, economists are divided on the subject. In an interview with Business InternJosé Torres, senior economist at Interactive Brokers, says housing faces a major pitfall:
“At this point, housing is inaccessible given household income and individual income. The percentage of the average monthly payment on household income and individual income is at record highs – similar to the levels we saw during the 2008 financial crisis… We are going to see something very similar to what we saw during the Great Financial Crisis.
Housing is obviously closely linked to the health of the overall economy. In this sense, both fields currently operate in a state of uncertainty. Whether housing proves the black swan, some claim, remains to be seen.
As of the date of publication, Shrey Dua does not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.