Why This Market Is Nothing Like 2008

The housing market has shifted, as you have likely heard from the headlines and maybe from other agents in the industry. So, how do some industry experts feel so confident in saying that a housing crash doesn’t look to be in the cards anytime soon? The reason for that comes from examining the trends and the environment in the years that led up to the crash and comparing that to what we’re seeing today.

While we could certainly tell you how this market is different from anything we saw in 2008, we feel that pictures paint a much better picture. Today, let’s look at some key pieces of data that highlight that today’s market is night and day compared to what we saw during the last market crash.  

There’s Still a Shortage of Homes 

It’s true that inventory is up from what it was last year. It’s also true that we’re starting to see a little more balance between available inventory and buyer demand. However, it’s important to keep in mind that the inventory needed to sustain a normal real estate market is about six months. Anything over that will likely cause prices to depreciate as there is simply not enough demand to warrant the supply. Anything below that is a shortage and will cause continued price appreciation as demand outweighs the supply. 

During the last housing crisis, there were too many homes for sale, many of which were short sales or foreclosures, which resulted in prices tumbling. Today, while supply is growing, we’re still short of the six-month balanced inventory level. 

The graph below compares what we’re seeing today to what we saw in the years since 1999. 

Why are levels as low as they are today? We are coming off of years of underbuilding combined with ongoing buyer demand as millennials hit their peak homebuying years. The lack of supply is getting better, but it won’t be fixed overnight and we suddenly won’t find ourselves in a situation where homes start depreciating due to there being too much supply. 

Lenders Have Stepped Up Their Standards

One piece of data to look at that highlights the difference between lending today and in 2006 is the difference in the Mortgage Credit Availability Index (MCAI). This data was taken from the Mortgage Bankers Association (MBA).

Back in 2006, lending standards were much looser, and just about anyone could qualify for a home. As a result, there were mass defaults, foreclosures, and falling prices and borrowers found themselves unable to pay off the loan they “qualified” for. 

Today, lenders have much stricter standards. This has only increased as we continue to navigate through economic uncertainty and monetary policy tightening. While this may be frustrating for anyone looking to buy in today’s market, this is overall a good thing that will prevent a risk of foreclosures and a massive decline in prices.

Far Fewer Foreclosures

As we mentioned, lending standards today are much stricter than they were in 2006. This means that buyers today are more qualified and are less likely to default on their loans. Additionally, homeowners today have fantastic equity in their homes that has not been tapped out. This means that homeowners would be able to sell their homes and pay back their mortgage and then some should they decide to change their living situation. 

Prior to the last housing crash, this wasn’t the case. Many homeowners were cashing in on their equity. The problem with this is that when home values began to fall, many homeowners found themselves in the red. The equity in their home wasn’t enough to pay off what they owed on their home, which resulted in foreclosures or short sales. 

The graph below from ATTOM Data-Solutions paints a picture of foreclosures today vs what we saw in 2008 & 2009. 

Bottom Line

We’re sure you’ve heard the argument that today’s market is nothing like it was in the years leading up to 2008. As the data shows, today we are still experiencing high demand and not enough inventory, tighter lending standards, and fewer foreclosures. While the market may be shifting towards a more balanced environment, there are no indications that it is headed towards the same fate as 2008.