Signs the Housing Market Is Going to Crash

Image by © The Balance 2019 

There are plenty of signs that the housing market could be about to crash. Four of the most important ones are rapidly rising home prices, a need for more affordable housing, an increase in nonbank mortgages, and a greater number of flippers—people who buy real estate with the intention of selling it quickly after making a few improvements.

Not all of those signs are present as of January 2020, but some are in place, and they raise the possibility of a significant drop in home prices sometime in the not-so-distant future.

1) Accelerating Home Prices

The key sign of a real estate bubble is a sharp increase in home prices. The S&P/Case-Shiller U.S. National Home Price Index rose for much of 2019 after dipping in late 2018 and January 2019, following a previous high of 205.572 in September 2018. In October 2019, the latest month for which a figure was available in January 2020, the index was at 212.426. That's 15% higher than the July 2006 high of 184.61400 for the index, which is based on a value of 100.000 for January 2000.

Among the country’s 100 largest metropolitan areas, 34% had overvalued housing stock in November 2019, according to CoreLogic Market Conditions Indicators data. That compares with 39% that were at their correct value and 27% that were undervalued in the same month, the latest one for which a figure was available as of January 2020. CoreLogic defines an overvalued housing market as one in which prices are 10% or more above the long-term, sustainable level.

2) A Lack of Affordable Housing

At the same time, affordable housing isn't easy to find. According to the 2019 State of the Nation's Housing report from the Joint Center for Housing Studies of Harvard University, 47.4 percent of renters spend more than 30 percent of their incomes on housing. Thirty percent is the standard level for determining whether a renter or homeowner is cost burdened because of housing costs.

Overall, the share of cost-burdened households has been falling—5.7 percentage points from a peak in 2010—to 31.5 percent in 2017. That improvement was due mostly to homeowners, whose cost-burdened rate dropped almost 8 percentage points in 2017, to 22.5 percent, its lowest share in this century. Renters' cost-burdened rate dropped 3.4 percentage points from a peak in 2011.

One notable change in the cost burden statistics for renters is that those with higher incomes are becoming increasingly affected: Among households earning $30,000–$44,999, the rate increased 4.6 percentage points from 2011 to 2017, and for households earning $45,000-$74,999, the rate rose 2.9 percentage points. For households earning less than $15,000, the rate stayed about the same, with 83 percent being cost-burdened.

3) An Increase in Mortgages From Nonbank Lenders

Another concern is the increase in lending by less-regulated mortgage companies. In 2018, nondepository, independent mortgage companies originated 57.2% of first-lien, owner-occupied, site-built home-purchase loans in the U.S. In 2017, they originated 56.1% of that type of mortgage, which was up from 53.3% in 2016, the first year in which independent mortgage companies made the majority of such loans since at least 1995.

Five of the 10 largest mortgage lenders in the U.S. are not banks. And the largest in terms of number of loans (not dollar amount) is privately owned nonbank lender Quicken Loans. Nonbank lending companies—which may be backed by a hedge fund or private equity firm—are less tightly regulated than banks, which most likely makes them more vulnerable to collapse.

4) An Increase in Home Flipping

The final indicator of a potential housing market crash is a surge in home flipping. That practice accounted for 5.4% of all single-family home and condominium sales in the third quarter of 2019, according to ATTOM Data Solutions. That percentage was down from 5.7% for all of 2016 and significantly less than the 8.2% rate for all of 2005.

By ATTOM's definition, flipped homes were renovated and sold in less than a year to a buyer who wasn't affiliated with the seller.

Article Sources

  1. Federal Reserve of St. Louis. "S&P/Case-Shiller U.S. National Home Price Index," Accessed Jan. 12, 2020.

  2. CoreLogic. "U.S. Home Price Insights Through November 2019 with Forecasts from December 2019." Accessed Jan. 12, 2020.

  3. Joint Center for Housing Studies of Harvard University. "The State of the Nation's Housing 2019," Page 4. Accessed Jan. 15, 2020.

  4. Consumer Financial Protection Bureau. "Data Point: 2018 Mortgage Market Activity and Trends," Page 6. Accessed Jan. 16, 2020.

  5. Consumer Financial Protection Bureau. "Data Point: 2017 Mortgage Market Activity and Trends," Pages 6-7. Accessed Jan. 16, 2020.

  6. HousingWire. "Here Are the Top 10 Mortgage lenders of 2018," Accessed Jan. 20, 2020.