Will the Housing Market Crash Soon? 3rd Quarter Update

I have to admit that the title of this article might be a little scarier than the message, however homeowners across the U.S. need to be kept up to date on what’s happening with their investments. My short answer to whether or not the housing market is about to crash again is “not immediately”. However, there are certain flags that are being raised which could be signaling the end of our current housing market upswing. The truth of the matter is that we don’t know when it will begin to turn downward. I don’t want to make predictions. Someone who tells you they can predict the housing market is a liar. It’s that simple. We don’t predict. The United States housing market and every individual market contained within it is a beast. Instead of predicting, we analyze the current conditions, comparing them to historic trends in order to stay aware of what’s on the horizon, and prepare to adjust accordingly. Here’s what’s happening in Louisville and across the United States:


~ When we talk about home value appreciation, a 4% – 6% increase per year is considered healthy and sustainable. If home values increase by much more than this, our economy won’t be able to handle the growth. When price increases outpace wage increases, home affordability drops dramatically, and we see the beginning of a market downturn.

~ When we talk about mortgage interest rates, 6% – 8% is the average interest rate on a 30 year fixed mortgage in a healthy housing market. Currently, our mortgage rates are hovering around 4%. Most of us have heard recent talk of interest rates being raised, a decision that is made by our government, which has been delayed a few times due to global crisis and uncertainty. Let’s be clear about this: our government wants to raise interest rates, but they don’t want to do it too soon and cause a market downturn. You can be certain that as soon as they can safely raise mortgage interest rates, they will. When interest rates rise, home affordability decreases.Housing Affordablilty


~ Across the United States, home value appreciation has averaged 7% per year since 2011. Remember what I said earlier about 4%-6% being sustainable? So, how long can our economy sustain this 7% appreciation? If you look at the long term historical average trend line (orange) of 4% appreciation in the graph below, you will notice that home prices will be back in that same range around the year 2020, provided the market continues to increase the way it currently is. Does that mean the market will take a dive in 2020? If you look at the trend line reset (green) and compare what happened between 2001 and 2006 to what’s happening now since 2011, one might think that the market peak could be late 2016 or early 2017, which would mean the beginning of a downturn. I’m not saying that it’s one way or the other, but it’s very important to be aware of these facts combined with the threat of higher interest rates.Home Price - Annual

~ Another factor that could help expedite the mortgage rate increase is our unemployment rate. Somewhere around 5% unemployment can be considered “normal”. Back when mortgage rates began falling our unemployment rate was between 9% and 10%. We are currently sitting at 5.3%. So, again, a lot of factors are pointing to the inevitable mortgage rate increase, and since that is the quickest thing that can happen, it’s an important item to keep an eye on.

~ This year in real estate we have seen a lot of multiple offer situations in which properties have sold for more than asking price. Why? Because inventory has been low. Money is cheap so there are tons of buyers, but there are fewer homes for those buyers to choose from, therefore it’s worth the extra money to most buyers to bid the price up in order to get the property they want. During a housing market downturn, sales go down, price goes down, and inventory goes up. Right before that downturn begins, sales are high, prices are high, and inventory is low. Sales this year are on target to be the highest since the recession. Prices continue to rise. What I will be paying close attention to over the next year is our inventory. When prices get higher and rates get higher; affordability decreases, and inventory begins to build up. When inventory builds up, prices go down.Housing Market Cycles


~ Since 2011, Jefferson County single family home prices have increased by an average of 4.4% per year. That’s taking into account a 2014 increase of only .5% and a 2013 increase of 7.3%. Currently our average sale price is 5.9% higher than last year. Jefferson County Average Prices

~ Between 2002 and 2006, when home price appreciation in the United States was averaging 10% per year, Jefferson County was only increasing at an average of 2.5% per year. None of those years showed more than a 4.8% increase.

~ Between 2006 and 2011, at the lowest point in the housing market downturn, the national average home price was 33% lower than it was at the peak. Jefferson County’s average home price was only 11% lower than it was at the peak.


Only a couple of conclusions can be drawn from this data:

1) Historically, Louisville / Jefferson County has a modest and fairly stable housing market.

2) The idea of a “national housing market” is absolutely ludicrous. Housing markets such as certain areas of California and Florida, for example, can skew national averages beyond recognition. National housing statistics need to be viewed side by side with a much narrower market.

People always ask me about “timing the market”. If you gain nothing else from this report, know that I analyze the numbers all the time. This is part of being a successful real estate agent, and the best way to properly “time the market”. If you have been thinking about selling your home, but you’re unsure of whether the time is now or next year, I want to look at your situation and tell you what makes the most sense. Be aware of what’s on the horizon, and know that we are nearing the top of the market again.

Call or email me for a no cost, no obligation evaluation of your home and your neighborhood – 502.509.9278 – justin@metrolouisvillemls.net

View Louisville homes for sale at www.louisvillehomeplace.com

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