Why I'm Not Worried About a Housing Market Crash

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  • An increasing number of economists believe the probability of a "severe downturn" in the U.S. housing market is on the rise.
  • Unlike the 2008 crash however, the surge in prices is primarily due to limited supply of houses coupled with high demand.
  • The 2008 Great Recession was fueled by an excess of housing inventory and predatory and loose lending.

Will the housing market crash like it did in 2008?

Are we going to see a housing bubble? According to new guidance from credit reporting agency Fitch, we may. In a recent release, Fitch analysts stated that the probability of a "severe downturn" in the U.S. housing market is on the rise. Home prices have fallen 10% to 15%, and housing activity has fallen by roughly 30%.

National Association of Home Builders Chief Economist Robert Dietz stated this week that we are in a "housing recession" due to "builder sentiment falling for eight consecutive months while the pace of single-family home building has declined for the last five months." While the sizzling housing market has slowed down this year, here is why I don't believe we will see a housing market crash like 2008.

Low supply and high demand

U.S. home values have increased by over 40% since the start of the pandemic. The dramatic escalation in prices was due to low interest rates, surging demand, and dwindling supply. As a result, housing affordability in the second quarter of 2022 has fallen to its lowest point since the Great Recession.

Unlike the prelude to the 2008 financial crisis, the price of homes have dramatically increased the past two years primarily due to low supply of homes combined with high demand. The pandemic, supply chain issues, and the crisis in Ukraine have exacerbated home inventory by extending build timelines and increasing prices of materials.

Prior to the 2008 financial crisis, there was an excess of new and available homes. This housing surplus resulted in mortgage lenders issuing loans to anyone who could fill that excess inventory. Which leads to my next point: Lending is much stricter today than it was prior to 2008.

Change in lending practices

The primary driver of housing prices in the mid-2000s was due to subprime lending practices, which provided mortgages to people with low credit scores. Mortgage lenders ran out of qualified people to lend to and with so many houses to sell, they began 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 cause massive losses to investors in mortgage securities."

Underwriters were violating the already-loose 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 ignited the financial crisis."

Lending today is much more strict. During the 2008 crisis, adjustable-rate mortgage (ARMs) loans with balloon payments made up 35% of mortgage loans. Now they make up less than 5%. Some in the real estate industry believe that today's strict lending rules are contributing to the housing shortage. When there aren't enough buyers, supply begins to shrink. Builders don't build as much. As a result, it is much more difficult to speculate in the housing market today.

Housing activity is slowing down

Like any asset, home prices can't go up forever. There are signs of the housing market slowing down. That's especially true as the Fed continues to raise interest rates to slow inflation. We saw record growth in home values the past two years, and that growth isn't sustainable. Millions were priced out of the market as home prices surged. On top of that, mortgage rates have almost doubled since the beginning of this year, slowing down the housing market even more.

As costs go up, demand inevitably will begin to decline. Does this mean we are about to see a crash? The chances would be much greater if there is an excess supply of homes, but there has been a sharp decline in new housing. According to the NAHB, "single-family starts (number of housing units builders develop) decreased 10.1% to a 916,000 seasonally adjusted annual rate and are down 2.1% on a year-to-date basis. This is the lowest reading for single-family home building since June 2020."

After home prices peaked in the first quarter of 2007, home prices plunged by 20%. With current economic conditions, the price of homes will most likely drop slightly or flatten out. Demand is still high, and in periods of high inflation, homeownership is seen as a hedge against inflation. "Most existing homeowners are insulated from high mortgage rates, thanks to more than 90% of loans in the past several years being vanilla fixed-rate, fully amortizing mortgages," according to a paper published by Zillow. "That keeps people's current bills affordable, and will prevent a foreclosure wave like the one that helped cause the housing market to spin out of control and crash in 2008."

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