The housing market will always have its ups and downs — but some fluctuations are much more dramatic than others. Homeowners and prospective buyers are often worried about the possibility of a market crash. These conditions can prevent new buyers from entering the real estate market and create significant financial burdens for current homeowners.
It is impossible to predict a market crash with complete accuracy. However, you can keep an eye out for signs of a decline. Here are the key indicators of an upcoming real estate market crash to watch for in Oakland County Michigan and across the country.
1. A Tightening Credit Market
One of the best but most overlooked indicators of a market crash is a tightening credit market. The condition of the credit market is an overall reflection of the economy — and as the market becomes more cautious, you can expect to see a major decline in real estate.
Credit markets are highly volatile. A sudden shift can have a dramatic impact on both residential and commercial real estate investing. When investors feel a sense of prosperity they lend more generously. When they have a fear of loss they tighten their lending practices — and as this creates a noticeable change in the market, more investors follow suit. This leads to a drastic and sudden downturn.
2. Home Pricing Plateau
A clear plateau after a period of rapidly rising housing prices is a key sign that the market may take a downward turn. While this may not indicate a complete market crash, it often occurs when the market is shifting. Houses are an appreciating asset — but prices cannot dramatically climb year after year without a plateau or decline. When fewer people are able to buy, sellers lower their prices to generate interest.
3. Rising Interest Rates
Low interest rates are a strong motivator for people to buy homes. As rates rise, the same homes become less affordable. High mortgage rates prevent many people from purchasing a property because the interest payments can become unmanageable.
Rising interest rates also contribute to the plateau of home prices. If a seller cannot get offers because rates are too high, they may lower their asking price to compensate. Like the general economy, the real estate market constantly cycles through highs and lows and corrects itself when it reaches either extreme.
4. More Borrowers Paying PMI
Buyers who make a down payment of less than 20% typically pay private mortgage insurance — PMI — which protects their lender in case of foreclosure. An increase in buyers paying PMI is a warning sign for two reasons.
First, borrowers who pay PMI are not in as strong a financial position as those who are exempt. Second, an increase in borrowers with PMI means more homeowners are at risk of going underwater on their mortgages. If the market declines and you did not make a large down payment, you may end up owing more than you can sell your home for.
5. More Foreclosures
An increase in foreclosures is an obvious yet significant sign of a real estate market crash. When more and more people are unable to pay their mortgages, there is almost always an unfavorable trend in the market. Foreclosures also create problems for the housing market because they sell at lower prices — forcing other sellers to drop their asking prices to compete, which drives down overall values.
What to Do If You Are Worried About a Market Crash
No one can predict a housing market crash with complete certainty — but there are plenty of signs to watch for. Rising interest rates, declining home prices, and shifting economic conditions can all indicate an upcoming correction.
To protect your finances, keep a careful eye on the market and avoid impulsive decisions. If you are nervous about the future of the Oakland County real estate market — consult with a trusted local expert about your options.
After 24 years and 700+ transactions serving Farmington Hills, Novi, Northville, West Bloomfield, and Bloomfield Hills — Tom Gilliam RE/MAX Classic has guided Oakland County buyers and sellers through every market cycle. Honest advice. Proven results.
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