Looking Ahead: Why Predictions of a Housing Market Crash Are Unfounded
While concerns about a potential housing market crash and the affordability challenges are understandable, it's important to note that the current housing market differs significantly from the conditions leading up to the housing crash of 2008. Several factors contribute to this distinction, providing reassurance that we are not experiencing a repeat of that crisis. Here are the reasons why:
Mortgage lending standards: Prior to the housing crash, lending standards were notably lax, allowing many borrowers to secure loans they couldn't afford. Today, lending standards are much stricter, ensuring that borrowers are more financially qualified and reducing the risk of widespread mortgage defaults.
Home equity and responsible borrowing: During the previous housing crisis, many homeowners found themselves owing more on their mortgages than their homes were worth, leading to a wave of foreclosures. In contrast, today's homeowners have more equity in their properties due to rising home prices. This equity provides a safety net and allows homeowners to sell their homes instead of facing foreclosure.
Supply and demand dynamics: The housing market today is experiencing a shortage of inventory, resulting in increased competition among buyers. This high demand, coupled with limited supply, helps to support home prices rather than leading to a collapse.
Economic factors: While there may be media discussions of a potential recession, it's important to note that the overall economic conditions are different now. The economy has shown resilience and recovery after the challenges posed by the COVID-19 pandemic. Factors such as job growth, low unemployment rates, and government stimulus efforts have contributed to the stability of the housing market.
It's crucial to approach the current market with a comprehensive understanding of these differences. While challenges and fluctuations may occur, the data indicates that the housing market today is fundamentally stronger and more resilient than it was during the previous housing crash.
It’s Harder To Get a Loan Now
The lending landscape has indeed undergone significant changes since the lead-up to the 2008 housing crisis. During that period, obtaining a home loan was relatively easier due to looser lending standards and more relaxed mortgage product offerings. This resulted in a higher level of risk for both borrowers and lending institutions, leading to widespread defaults, foreclosures, and declining home prices.
In contrast, today's mortgage market has implemented stricter lending standards to reduce risk and ensure borrowers are more financially qualified. The graph below, utilizing data from the Mortgage Bankers Association (MBA), illustrates this difference by comparing mortgage credit availability over time.
The graph demonstrates that the availability of mortgage credit is represented by a lower number during the present time, indicating a more stringent lending environment. Mortgage companies now have tighter requirements and criteria for loan approval, focusing on factors such as credit history, income verification, and debt-to-income ratios. This shift in lending standards helps to mitigate the risk of potential defaults and supports a more sustainable housing market.
While these stricter standards may present some challenges for borrowers, they also contribute to the overall stability of the housing market. By ensuring that borrowers have the financial means to repay their loans, the likelihood of widespread defaults and foreclosures is significantly reduced.
It is crucial for prospective buyers to be aware of these differences in lending standards and to approach the homebuying process with realistic expectations. Consulting with a trusted lender and real estate professional can provide guidance and help navigate the current mortgage landscape.
Unemployment Recovered Faster This Time
The impact of the pandemic on unemployment has been notable, with a significant spike in joblessness over the past couple of years. However, it's important to recognize that the jobless rate has since rebounded and returned to pre-pandemic levels, as depicted by the blue line in the graph below.
The swift recovery of the job market has significant implications for the housing market. The high employment rates observed today contribute to a more stable housing market by reducing the risk of homeowners facing financial hardship and potential loan defaults. This favorable employment situation helps strengthen the overall foundation of the housing market and minimizes the likelihood of an influx of foreclosed properties entering the market.
When individuals are gainfully employed and have a steady income, they are better positioned to meet their financial obligations, including mortgage payments. The reduced risk of defaults and foreclosures alleviates the potential downward pressure on home prices and market stability.
Moreover, a robust job market also supports consumer confidence and purchasing power. With more people employed, there is a larger pool of potential homebuyers, stimulating housing demand and maintaining a healthier balance between supply and demand.
It's important to note that while the current job market recovery is favorable for the housing market, economic conditions can change over time. Staying informed about employment trends, economic indicators, and local market dynamics remains essential for making informed decisions in the housing market.
Consulting with real estate professionals and financial advisors can provide valuable insights tailored to your specific circumstances, ensuring you navigate the market with a comprehensive understanding of the current employment landscape and its impact on the housing sector.
There Are Far Fewer Homes for Sale Today
During the housing crisis, one of the contributing factors to the significant decline in home prices was the oversupply of homes for sale, including a substantial number of short sales and foreclosures. However, the current housing market presents a different scenario. There is currently a shortage of available inventory, primarily resulting from a prolonged period of underbuilding homes.
The graph below, utilizing data from the National Association of Realtors (NAR) and the Federal Reserve, provides a comparison of the months' supply of homes available between the present time and the housing crash. Currently, the unsold inventory represents a 2.6-month supply, indicating a scarcity of homes on the market. This limited supply of inventory suggests that home prices are not likely to experience a significant crash similar to the events of 2008.
The low months' supply of homes underscores the strong demand in the housing market and the lack of available options for buyers. With a shortage of inventory relative to buyer demand, it creates a more competitive environment and can lead to sustained home price appreciation or at least stable price levels.
It's important to note that real estate markets can vary by region, and local factors may influence inventory levels and price dynamics. Consulting with a local real estate professional can provide insights into the specific market conditions in your area, allowing you to make informed decisions regarding home buying or selling.
Overall, the current shortage of inventory contributes to a different housing market landscape compared to the housing crisis. The limited supply of homes available for sale, coupled with strong demand and improved lending standards, helps support a more stable housing market with less risk of a significant price crash.
Equity Levels Are Near Record Highs
That low inventory of homes for sale helped keep upward pressure on home prices over the course of the pandemic. As a result, homeowners today have near-record amounts of equity (see graph below):
“Most homeowners are well positioned to weather a shallow recession. More than a decade of home price increases has given homeowners record amounts of equity, which protects them from foreclosure should they fall behind on their mortgage payments.”
The graphs above should ease any fears you may have that today’s housing market is headed for a crash. The most current data clearly shows that today’s market is nothing like it was last time.