Why Do People Think the Real Estate Market Will Crash?

The hot topic in real estate right now is a Crash, à la 2008.  I am going to discuss the likelihood of a crash… but not here.  In cliffhanger fashion, I will put out another article tomorrow in which I’ll discuss the likelihood of a crash.

What I’d like to discuss here is why an imminent real estate market crash is such a widely-held belief right now. As a real estate professional, Crash Talk is, lately, a daily part of my life… in conversations with the general public and with other real estate professionals. Regardless of the data supporting – or not – a crash, I want to talk about why people’s minds even entertain the thought. 

Heard mentality

One of my favorite words is catastrophize (which isn’t in my Oxford printed dictionary but Merriam-Webster.com tells me has been around since 1962) because I feel as if so many of the problems people face haven’t actually happened and probably never will. And I think that this idea applies here.  People are viewing changes in the market and catastrophizing them into a market implosion because it’s what we do.  We, as people, don’t like to paint rosy pictures.

So we automatically go to the catastrophic end in our heads and then herd (heard) mentality plays right into it… “Someone said there’d be a crash and that a crash would be terrible, so I believe it too and it’s gonna be really bad.”  No facts here – just human nature.

Crash /kraSH/

“a sudden disastrous drop in the value or price of something…” [1]

Let’s try to define crash.  We can all agree that a crash means that the value of the crashee has diminished.  But no one discusses the severity… ‘going down in value’ and ‘disastrous drop in the value of something’ are not the same.  So when I speak of a crash, is it the same crash of which you speak?  Do most people mean to imply ‘disastrous’ when they say crash? Or do they mean something less severe?

And then the news media gets involved and it’s even worse.  They have the dubious label of authority, they have the definite advantage of reach, yet they have the same blurry definition of what they’re reporting.  (I’m sure they prefer the more extreme implication). Are they using the same definition as the audience?  Certainly not.  They’re talking to millions and, as you know, there’s no way that millions of people are on the same page about anything.  Ever. 

One thing that we can probably agree on, though, is that crash is universally perceived as bad, regardless of the severity.  No one ever says, “that was a market crash,” meaning, “that was a totally excellent market crash”.  So, that’s that.

But is it?  Is a crash bad?

In the instance of today’s real estate market, would the results be universally bad (as crashes are supposed to be)?  I would say that a lot of people who are worrying about a crash have no reason to and that some others might even consider hoping for a crash of some flavor.  (Remember, I’m not talking about a recession or inflation or job loss here – just real estate crashes). 

Don’t Worry, Be Happy

Does a market crash really matter to those who own a house and have no plan to move any time soon?  Does the market really matter? Your residence is not a day trade.  You’re most likely locked into a low, low 30-year rate on your house, so you know exactly what you’ll be spending every month. What payment you can afford is what determines your home purchase in the first place – regardless of the value of the asset underneath.  You are paying the same amount for the benefit of a place to live regardless of the current value. 

Same goes for investors (not to be confused with flippers – nothing wrong with flipping but it is speculative and times of devaluation can definitely hurt these day traders of real estate). Investors continue to collect rent.  And as rents increase over time - and there’s no indication they won’t – while mortgage payments stay fixed at those low rates, cash flows increase.  As a matter of fact, in investment real estate, people often discuss buying the stream of income, not the asset.  Investment real estate analysis is based on income.

And what about people who don’t own real estate but would like to?  There is an entire segment of the market – made up largely of Millennials and those younger (that is, First Time Homebuyers) – who were priced out of homeownership because of the huge increase in values.  If the market were to ‘crash’, it might not be so bad for those folks. All else (interest rates) equal, a lower price means more house for the money.  Or any house for the money.

Some people bemoaning the idea of a crash might actually benefit from it.

Fake News – More Reasons a Crash is Assumed

Part of the reason that a crash is assumed by the public without much thought is because the sources of so many people’s news are social media and mainstream media.  And, I’m here to tell you – in case you didn’t know – both sources love sensationalist hype. 

As to the mainstream media, the adage goes, “It’s got to bleed to lead”.  Creating a teaser that says, “Tonight, everything is fine.  News at 11,” doesn’t pique much interest.  So with everything from weather to war to economics, we hear the stuff that the media thinks will grab and hold our attention.  Like train wrecks – figurative and literal.

The problem with social media is two-fold.  There’s the same sensationalism, of course.  And there’s also the fact that anyone can say anything without any substantiation, research, or knowledge.  Most alarmingly, everyone else eats it up.  Why would anyone listen to some Facebook dunderhead spouting wild opinions about anything – does he or she have some innate knowledge or learned authority about the subject?  Particularly about anything as complex as economic markets? So much of what I read about real estate and economics is simply make-believe or relies on circular logic. 

All of this is to say: our sources suck.

Short Memories and Quid Pro Quo

And let’s discuss people’s short memories. 

People think a crash is imminent because, well, it’s what happened last time we took a crazy ride on the real estate express.  The Great Recession, or the World Financial Crisis, or whatever you want to call it, is the freshest experience in our minds.  Because of our short memories, we find it easiest to assume this will happen again: “last time there was a big thing in real estate, the financial world fell apart.”

But, of course, that’s faulty logic – there are always ups and downs (thus cycles) – but ‘up’ cycles aren’t all clones of each other nor are ‘down’ cycles. They also don’t necessarily act like their antecedents.

It’s also faulty fact gathering – the real estate environment is nothing like it was before the Great Recession.  I’m not going to back this assertion up right now – I will in tomorrow’s article – but, if you can’t wait, hop on Google.

Lastly there are the ultimate pessimists who think that a penance is due.  I can understand the thought processes behind the other outlooks we’ve talked about, but this one kind of cracks me up. 

As it turns out, after much research (you can Google this too if you don’t believe me), I have determined that “Pay the Piper” is not an official part to any business cycle.  Just because things are (perceived as) really good (which we’ve already determined they may not necessarily have been) does not mean that the Universe somehow knows this and is going to bring things back to ‘even’ by manifesting something really bad.  I really doubt the Universe gives much thought to our business cycles.  And if it did, I don’t think it would run things using a tit for tat system.  Universes are way cleverer than that.

[1] New Oxford American Dictionary, Third Edition