How the housing market can just “crash”? I (think I) get how the prices can go up, but what makes them go down suddenly?


How the housing market can just “crash”? I (think I) get how the prices can go up, but what makes them go down suddenly?

In: 1

People stop being able to afford the current price or can’t get a loan for the current mortgage interest rates at a time that people are still needing to sell their house. If buyers dry up, the price has to drop until buyers return.

For example, if we have a recession at a time of increased interest rates, some people will HAVE TO sell because they lost their job and can’t afford their mortgage payments but no one can buy because current mortgage interest rates have doubled. So, a $500,000 house bought three years ago costs $2000 per month now might sell for $400,000 but actually cost $2400 per month due to increased interest rates. Good luck with that!

According to what i think there are 2 reasons :

1. Extreme Fear in a case like the current scenario when a war is going on inflation is at peak which leads to reduced demand.

2. No Money in the economy of the country


But pls correct me if I may be wrong

Supply and Demand

If 10 people want your house, they start offering more and more money driving the price up.

If 1 person goes to buy a house and there are 10 houses on the market in the area they want to live, all the sellers start dropping the price because they want there home to sell.

What makes this happen in short time periods are catalysts such as the recent fed move to raise interest rates. This makes it more expensive to borrow money which means less people buying homes.

It’s important to understand that the prices in a market are largely dependent on the **perception** of value. When discussing economics, people generally assumed to be rational actors who have access to perfect information, but in reality that is never the case. This is also complicated by the term “housing market” referring to two distinct but interconnected things: the market of actual homes being sold or rented, and the market for housing bonds.

A housing bond is a financial instrument in which a bank agrees to give the owner of said bond a portion of the profit they make from a set of thousands of housing loans. While it’s obvious how the actual market influences the housing bond market, it’s not immediate obvious how the reverse happens. Because the banks are both issuing the loans and sell the bonds, this creates a perverse incentive to issue more of the kinds of loans that make the banks more money when they sell it as a bond. This problem spreads throughout the actual housing market, as bank issues more loans to developers to create the kind of housing that makes them the most money in bonds, regardless of the demand in the actual market. These homes to sold to speculators who expect to be resell the house at a later date, but are ultimately unable to because the house that was built meets the bank’s demand instead of people who actually want a home.

Because the speculators bought when the perceived value was high, they need to sell it at a high price in order to make their money back. However, as some point, they realize that they can’t, and the price will drop to what the market is actually able to afford.