Is A Housing Market Crash Coming?
Updated: Nov 18, 2022
The housing crash of 2008 changed how Americans looked at homebuying. Is history bound to repeat itself?
Instead of being the status symbol of the American Dream, home ownership in 2008 was a nightmare for many. Waves of foreclosures caused families to scramble for a place to live. Builders abandoned construction projects, leaving partially built homes to decay next to newly built structures. For sale signs were everywhere and homes were selling for pennies on the dollar.
Almost 15 years later, a new generation of home buyers have entered the market. These buyers come with memories of the 2008 meltdown at the forefront of their minds. These first time home buyers were teenagers and young adults during the 2008 housing market crash - and they're determined not to have the same fate as their parents. But are their fears justified?
What caused the 2008 housing market crash?
A variety of factors contributed to the housing crash of 2008. Low doc and no doc loans were given to anyone that wanted one. This allowed borrowers to take out loans on homes they couldn't possibly afford. Generous lending requirements allowed buyers to purchase homes with questionable credit history. It wasn't uncommon for a property to be bought and sold multiple times within a year, at unjustifiable prices. When these loans went bad, the mortgage industry collapsed.
This loss of liquidity meant that there was no money for banks to lend - and therefore no new mortgages were able to be written. The massive wave of foreclosures created a huge supply, while the inability to obtain a mortgage significantly reduced demand. This classic economic principle caused home values to plummet.
Will there be a housing market crash in 2023?
While there has been much talk about a housing recession, current conditions are very different from the 2008 market collapse (check back soon for my housing recession blog entry).
Recently, historically low interest rates drove buyers to the market, creating huge demand for real estate. However, a surge in labor and material costs - driven by a pandemic induced shortage - caused housing supply to decrease. New construction has been slow to non-existent. New homes that are being built have been priced out of the range of most first-time home buyers.
Now that mortgage rates have retreated from their historic lows, buyer demand for housing has decreased. However, there is no pressure for sellers to enter the market. In order to have the next market crash, something has to happen to push a glut of housing supply on the market which exceeds current demand.
In contrast to 2008, today's tighter lending requirements means that homebuyers that took advantage of low interest rates are less likely to foreclose. Home builders continue to be cautious about their projects. Even a drastic economic downturn such as a recession is unlikely to drive a large amount of sellers to the market at once. Historically speaking, recessions don't lead to real estate crashes.
While this current real estate market is certainly one that will be studied for years to come, conditions are totally different than in 2008. Financial market conditions would have to erode substantially in order to create a housing surplus, decreasing property values. Those conditions don't appear to be on the horizon. A housing market crash in 2023 is unlikely.
Do you agree or disagree? Let us know in the comments.