Why can’t housing prices crash without crashing the rest of the economy?
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Any drastic changes in prices tend to be bad for an economy. It’s called a shock. People and businesses generally plan using assumptions and when those assumptions get violated by things like a price shock, it tends to cause other problems as other parts of the economy will be slow to respond and adapt.
You’re not going to get 1 answer nor any answer with good certainty. There’s a lot of unknowns and the economy is complicated. But you can see how a housing crash could cause some big problems to those immediately effected. Whether or not a housing crash could be better for the economy long term is anyone’s guess.
Some things of note:
1. Housing tends to represent a large portion of the wealth of most of the middle class. Losing that could suddenly shrink the middle class which will have cascading effects on things like demand for goods and services which can set off a cycle of businesses closing down as demand drops.
2. Mortgages represent a lot of debt and that debt is held by a lot of people directly and indirectly. Banks obviously would suffer as they would suddenly lose a bunch of assets. But the knock-on effects are any other businesses that might be parking their assets in “safe” investments like mortgages or dependent on banks loaning them money. Which can lead to them going out of business, laying people off, which once again lowers demand and causes other businesses to go out of business.
3. Housing price crashes don’t typically happen in a vacuum. The 2008 financial crisis wasn’t only caused by falling property values that resulted in bad mortgages. There were some really bad systemic problems that fed a property bubble and when that burst it exposed the systemic problems. Fundamentally it might be possible to have a housing price crash without destroying the economy. It’s just that experience has shown that they tend to happen together and are a result of multiple things going wrong.
Technically they can… but it’s unlikely. Housing prices can crash in a certain region, but in a general level, it would be hard due to interconnectedness of housing market in many other parts of financial systems. Not all housing markets are systemically important, some just crash due to exogenous effects like rises in crime and what not.
But for the whole economy, housing market is a source of wealth to many families, mortgages are bundled and bought into by large pension fund and 401k’s, cities and counties live on property taxes which are dependent on assessed values, etc. In a market where majority of houses are owned via a mortgage, that mortgage essentially serves as a put option if prices go down low enough. And that’s what happened in 2008, when prices got cheap enough where it made sense for people to foreclose on their home and buy their neighbors home down the street for 1/5 of the price.
Tl;dr they can crash but only on confined regions. As a whole… nah, to interconnected!
The simple answer is because the economy is the measure of people spending on things. If suddenly your mortgage sky rockets or the value of your house plummets (and you need to renew your mortgage) then you’re less likely to feel comfortable going out for dinner, buying products etc.
The stock market is not the economy
Housing prices are a major component of the economy, and they can have a significant impact on other areas such as construction, real estate, banking, and consumer spending. When housing prices crash, it can lead to a decrease in construction activity, which can result in job losses and reduced economic growth.
Furthermore, many people invest in real estate, either by buying properties or through mortgage loans, so when housing prices decline, their investments lose value. This can weaken banks and other financial institutions that are exposed to the real estate market, potentially leading to a credit crunch that can further harm the economy.
Lastly, when homeowners see the value of their homes drop, they may become less likely to spend money, which can affect businesses that rely on consumer spending. All of these factors can contribute to an economic downturn that can be difficult to recover from.
So everyone is kind of saying the same thing, but…I don’t really know what happens when it’s the inverse? Or what would need to be true for housing prices to crash but everything else is okay?
Because…people can’t afford houses or rent without basically dying.
So…basically for housing prices to go down, the economy would need to crash…
But then somehow no one would still be able to afford houses because everything else would crash?
I’m kind of…missing why the bad actors in the situation just get to get off scot free with it and there’s no way to beat them ever? That…doesn’t make sense to me…?
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