Could inflation and rising rates cause a housing market crash?

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MISHAWAKA, Ind. --- The housing market has been difficult for first time home buyers.


Many have been forced to make cash offers above-asking price or waive inspections.

The inflated prices are causing some to worry about a potential market crash.

“That appears to be the path that we’re going down. Part of the affordability that goes along with buying a house is the ability to finance it at a very low rate and by the end of this year, at least looking at the financial markets, there’s the expectation the risk-free interest rate should be around 2 1/2 percent," said Russell Rhoads, Associate Clinical Professor, IU Kelley School of Business.

The fed raised interest rates, last month, for the first time since 2018. Increasing rates a quarter of a point.

Officials expect we could see as many as six more rate increases this year.

Rhoads suggests renters hold off on buying for at least the next year because a wave of foreclosures on over-ambitious mortgages could drop prices soon.

“If you’re really trying to be opportunistic and in getting yourself into a home, I think right now you may have some buyers regret a year or two down the road where the same house might be worth 20% less," said Rhoads.

Mortgage Loan Officer Arielle Schmitt says the interest rate hike caused her to reach out to clients over the past few weeks to reassure them buyers are more protected now than in the 2008 housing crisis.

She doesn’t expect pandemic-driven home prices to lead to defaults and foreclosures.

“Mortgage lenders didn’t have to be licensed before 2008. So, there’s so many more protections in place to protect home buyers from being put into a situation where they’re in a home that they can’t afford,” said Schmitt.

Schmitt encourages potential buyers to still act now.

She believes if buyers are intentional on location, and buy as much house as you can afford, the investment should still pay off.

“With this increased interest rate the good that can come from it is gonna be that there will be less buyers for the sellers and so hopefully balance and it will stabilize the market so that it won’t be so up and down," said Schmitt.

The Fed is set to meet again at the beginning of May.

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