A Housing Market Crash Is Coming. Here's How to Prepare

How can we be sure that the rapid rise in U.S. home prices is not sustainable? History and common sense are the best sources of information. The common sense says that everything will work out. There is a possibility that supply will rise as people sell more homes and there will be less inventory, which could lead to lower prices. It could be that the prices reach a tipping point and home buyers who are looking to save money by getting a low rate of interest will lose interest as skyrocketing prices consume any savings.However, anyone who claims they can predict the crash of the housing market should be checked to see what they are selling. It is difficult to predict when the housing market will collapse. There are so many moving parts that it is constantly changing. Here's what we can confidently tell you.Get started on your financial journey with a bang. We offer free access to select products that help us achieve our financial goals. These carefully-vetted picks may be the answer to your financial woes. You agree to us sending money tips and products and services to your email address. You may unsubscribe at anytime. Please refer to our Privacy Statement and Terms and Conditions.The future is brightAlthough nothing is certain in real estate, the Federal Reserve intends to maintain the prime rate, the rate at which banks lend money to each other, low through 2022. Consumer interest rates will remain low if the prime rate remains low. This alone should be enough for home buyers to be interested. Fannie Mae's Economic and Strategic Research Group forecasts that the U.S. will grow 6.8% by 2021, and this makes it a strong market in the near future.Inventory is another issue. Builders are not at pre-pandemic levels due to labor and material shortages. Homes will continue to sell at higher prices than expected as long as there is not much inventory.But, where does that price stop? Real estate investors are not interested in paying top dollar to buy properties that they intend to make a profit on. There are only so many home buyers who have enough cash to cover the difference between what the asking price is and how much the lender will lend. All-cash buyers will eventually settle, and those still looking for homes will need to be able to access a stable market.Also, it is unlikely that housing prices will fall immediately. Zillow Economic Research predicts home values will rise 10.5% to 2021 from their current levels.This is the evidence: History repeats itselfIt doesn't matter how good things seem for home sellers right now, but a quick look back at history will remind us that what goes upwards must also come down. It is important to remember why each crash occurred and to identify similarities in the current market.Panic of 1837There were several upswings in the 19th century housing market, but then there were crashes of different intensity. The Panic of 1837 was caused by speculative lending practices and unsustainably high property prices. It was a huge crash.After the Panic in 1837, and relative recovery, there were more dramatic market ups or downs. It seemed that housing prices would never stop increasing, but then something happened to shake up the economy and house values began to drop. This is an example of the 1873 stock market crisis. The stock market plunged, causing a halt to the momentum that was sweeping the country.1929 Wall Street crash and Great DepressionAfter a decade with skyrocketing home prices, the stock market crash in 1929 saw values fall. Families who were wealthy in property suddenly had little. The Great Depression followed the crash, further reducing property values. Prices in the United States did not recover until 1960.2008 housing bubbleThe early 2000s saw almost anyone who had a pulse be approved for a mortgage. Housing prices rose quickly. Home buyers who had taken out adjustable rate mortgages in 2006 saw their monthly payments rise by up to 60%. The market crashed in 2007 as thousands of homes were put into foreclosure.These are just a few examples where housing prices have risen to historical levels only to plummet to more realistic levels.Experts weigh inExperts agree that there is little chance of the U.S. experiencing a similar magnitude to the 2008 crash. This could be due to legislative changes in lending practices.Sometimes, what we call "crashes", are actually just that. They are more often a cooling of market and a pushback against home prices. The history of the housing market shows that it peaks around every 18 years and then crashes (small or big). This is normal and to be expected. Real estate investors can pick up the best deals and first-time buyers can become homeowners when this happens.Protect yourself with these five waysThis advice is important if you are looking to get into the housing market soon.1. Do not get too caught up in the purchasing frenzyYou will be in trouble if you pay more for a house than it is worth when the market corrects itself.2. 2. Don't spend more than you can affordSimply put, if your mortgage payments are going to be expensive, it's better to look at properties that are less expensive.3. 3.Make the biggest down payment that you can affordYour home equity will increase the larger your down payment. Equity is the difference between your mortgage payment and the value of your home. It also refers to how much equity you have in your home. Sometimes, equity is all that's needed to prevent a homeowner from losing their home.4. Your emergency savings account should be builtIt is a good rule of thumb to have enough money to cover three to six month's worth of emergency expenses. You may need to have a larger emergency fund depending on your level of comfort.5. Consider refinancingIf you own a home, now is the time to decide if it's time to sell. Refinancing an existing mortgage at a low rate is an option if you are unable to wait.The home value is indicative of many things. This includes the economy in general and geopolitical activities. We also know that there will be a global pandemic. You can plan for the day the market crashes, even if it is a more soft landing.