Why can’t housing prices crash without crashing the rest of the economy?
In: 11
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!
Latest Answers