A real estate investor thinks the housing market will experience a “Black Swan” event within the next year due to affordability pressures.

Sean Terry, a former U.S. Marine and founder of the real estate investing company Flip2Freedom, recently said on the podcast “Real Estate Disruptors” that the U.S. housing market’s high interest rates combined with still high housing prices is posing an affordability conundrum that could eventually force  the housing market to crash.

“How do you make housing affordable? If you have to raise interest rates, the prices have to come down. So something will crack,” Terry said on the podcast, Newsweek reported. “I think we’re going to have a Black Swan event (that’s) going to come here probably in the next six to eight months. Some sort of Black Swan something.”

Terry pointed to the Federal Reserve and its efforts to tamp down record levels of inflation as what could push a Black Swan housing market crash or an unpredictable event with severe consequences that is beyond what is normally expected but in hindsight seems obvious.

“I think they’re on this path to continue to raise because they want to crash the market. They want affordability to come out,” Terry said of the Fed.

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Does the Federal Reserve really want a housing market ‘crash’?

To say the Federal Reserve wants a “crash” isn’t entirely accurate, however. The Fed has been trying to balance its rate hikes while steering the U.S. economy toward a “soft landing” — in other words, curb inflation without causing a deep recession. Last year, Fed Chairman Jerome Powell also said the U.S. housing market would likely need to go through a “difficult correction” before achieving “better balance” in prices and affordability.

The question is whether the Fed can achieve a soft landing and a housing price correction without tipping the economy into a spiraling recession. After an unprecedented streak of rate hikes, the national housing market has indeed seen a correction — but it has been a divided correction, with some regional areas harder hit than the others.

While local markets in the East have largely already begun rebounding, the West has seen some of the most dramatic price declines as its once boiling housing markets reckon with interest rates now hovering over 7%, a far cry from some days of 3% rates during the pandemic housing rush in 2020, 2021 and 2022.

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Still, affordability is still a stark issue, even in the West where prices have ticked down. Terry noted the nation’s housing affordability level is the lowest it has been in years, pointing to the Federal Reserve Bank of Atlanta’s Home Ownership Affordability Monitor which scored a low 69.5 in June, lower than at the peak of the housing bubble in 2006.

Federal Reserve’s increased rates

There could be more pain coming. After the Fed took a pause from its streak of rate increases in June, it announced in July a .25% hike to its benchmark lending rate from 5.24% to 5.5%, the highest it has been since 2001. Last month, Powell signaled the Fed may not be done raising its rate with wide swaths of the economy still running too hot.

Terry believes additional rate hikes are imminent, plus he noted there’s an election year coming up that could also influence this “Black Swan event” that’s “going to rock the markets.”

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He also harkened back to the housing bubble that preceded the Great Recession in 2008 and the dozens of banks that failed amid the subprime mortgage crisis, largely fueled by risky lending and banking practices which fed a glut in the housing market. Terry noted three banks have failed in 2023, Silicon Valley Bank, Signature Bank and First Republic. When sizing up those banks’ total assets, adjusted for inflation, they were larger than the 25 that failed in 2008, The New York Times reported.

Housing market crash is not imminent, according to experts

However, housing experts have consistently been saying a 2008-like crash is not imminent — that a nationwide housing shortage is what has kept home prices high, despite elevated interest rates. Though high rates have somewhat helped tip prices down in some areas, it’s low availability of homes that’s keeping demand high and therefore pressurizing prices.

That’s why, regardless of whether the economy sticks a “soft landing” or enters a mild recession, the U.S. housing market is likely to stay the same, Fannie Mae economists recently wrote in a commentary. They continue to predict a mild downturn in the first half of 2024.

Housing market faces limited supply

Lawrence Yun, the National Association of Realtors’ chief economist, told Newsweek the housing market’s problem is limited supply, which predated the pandemic when there was a shortage of about 4 million to 5 million housing units in 2019.

“That came about due to population and job growth that outpaced new-home construction,” Yun told Newsweek. “Then, the shortage worsened during the first year of the COVID-19 real estate boom as many desired to take advantage of the historically low interest rates. The shortage intensified when mortgage rates shot up due to homeowners who have been unwilling to list and give away their locked-in low rates.”

Yun sees two future scenarios playing out based on a variety of factors, Newsweek reported. One could be “some calming” in the economy that could lead to lower mortgage rates and more buyers entering the market. Homebuilders may also up construction.

“Home prices are not crashing in this scenario,” Yun told Newsweek. “Home price growth will depend on whether homebuilders can bring sufficient supply to the market.”

The other scenario, Yun said, is if an economic recession leads to job losses and, in turn, forced selling of homes and less consumer confidence. That would also lead to much lower interest rates, which would encourage employed Americans to enter the market.

“This scenario may cause home prices to rise faster, especially if some wealthy people decide to reallocate investments from the stock market to real estate,” Yun said. “We will not have a repeat of the 2008–2012 housing market crash. There are no risky subprime mortgages that could implode nor the combination of a massive oversupply and overproduction of homes.”

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