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.
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