Will the housing market collapse like it did in 2008?
- A growing number of economists believe the likelihood of a “serious downturn” in the US housing market is on the rise.
- Unlike the crash of 2008, the price spike is mainly due to a limited supply of homes coupled with strong demand.
- The Great Recession of 2008 was fueled by excess housing inventory and predatory, cowardly lending.
Are we going to witness a real estate bubble? According to the new guidelines of the credit reference agency Fitch, we can. In a recent statement, Fitch analysts said the likelihood of a “severe downturn” in the US housing market is rising. Home prices fell 10-15% and real estate activity fell about 30%.
The National Association of Home Builders’ chief economist, Robert Dietz, said this week that we are in a “housing recession” due to “the decline in builder sentiment for eight straight months as the pace of construction number of single-family homes has declined over the past five months. Although the sizzling housing market has slowed this year, here’s why I don’t believe we’ll see a housing market crash like 2008.
Low supply and high demand
Home values in the United States have increased by more than 40% since the start of the pandemic. The dramatic price escalation was due to low interest rates, rising demand and shrinking supply. As a result, housing affordability in the second quarter of 2022 fell to its lowest point since the Great Recession.
Unlike the prelude to the 2008 financial crisis, house prices have risen significantly over the past two years, primarily due to low supply of houses combined with strong demand. The pandemic, supply chain issues and the crisis in Ukraine have exacerbated home inventories by extending construction times and increasing material prices.
Before the financial crisis of 2008, there was an excess of new and available housing. This housing surplus caused mortgage lenders to lend to anyone who could fill this excess inventory. Which brings me to my next point: lending is much tighter today than it was before 2008.
Changing Lending Practices
The main driver of house prices in the mid-2000s was due to subprime lending practices, which offered mortgages to people with low credit scores. Mortgage lenders ran out of qualified people to lend to and with so many homes up for sale, they started to cut corners. A congressional commission found that the Great Recession was caused by lenders making loans “that they knew borrowers could not afford and that could result in massive losses for mortgage-backed securities investors.”
Underwriters were violating already lenient lending standards by engaging in predatory lending, document fraud and, in some cases, criminal behavior. A Senate investigation concluded that these risky loans “were the fuel that started the financial crisis”.
Lending today is much stricter. During the 2008 crisis, adjustable rate mortgages (ARMs) with lump sum payments accounted for 35% of mortgages. Today, they represent less than 5%. Some players in the real estate industry believe that today’s strict lending rules are contributing to the housing shortage. When there are not enough buyers, the supply starts to decrease. Builders don’t build as much. As a result, it is much more difficult to speculate in the housing market today.
Real estate activity slows
Like any asset, house prices cannot rise indefinitely. There are signs of a slowdown in the housing market. This is especially true as the Fed continues to raise interest rates to slow inflation. We’ve seen record growth in home values over the past two years, and that growth is not sustainable. Millions were taken off the market as house prices rose. In addition, mortgage rates have almost doubled since the start of this year, further slowing the housing market.
As costs rise, demand will inevitably begin to decline. Does this mean we are about to see a crash? The odds would be much higher if there was an oversupply of housing, but there has been a sharp drop in new housing. According to the NAHB, “single-family housing starts (the number of housing unit builders expand) fell 10.1% to a seasonally-adjusted annual rate of 916,000 and are down 2 .1% on an annual basis. This is the lowest reading for single-family homes construction of single-family homes since June 2020.”
After house prices peaked in the first quarter of 2007, house prices plunged 20%. With the current economic conditions, house prices will most likely drop slightly or flatten out. Demand is always high, and in times of high inflation, home ownership is seen as inflation protection. “Most existing homeowners are sheltered from high mortgage rates, thanks to the fact that more than 90% of loans in recent years have been vanilla, fully amortized fixed rate mortgages,” according to an article published by Zillow. “It keeps people’s current bills affordable and will prevent a wave of foreclosures like the one that helped send the housing market spiraling out of control and crashing in 2008.”
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