2008 all over again? Not so fast.

Why we’re not headed for a repeat of 2008 in housing

In my last newsletter, I brought some perspective and context to what we’re going through in the housing market today.   It’s easy to see the headlines in the news today and conclude that we’re headed for another major crash in the real estate market. But a look at some key aspects of the housing market today should help us understand that while the market is shifting, the market is in a much healthier place than it was heading into 2008.

Inventory

In any market, value is based in part on supply and demand.  Simply put, prices tend to fall in a market with excess supply, and prices tend to rise or hold steady in a market with limited supply.  In 2022, we are still dealing with inventory challenges.  In short, there are far more people trying to buy homes than there are homes for sale, which maintains upward pressure on prices.

                2007 – About 9 months’ supply

                2008 – About 10.5 months’ supply

                2021 – Just over 2 months’ supply

                Source:  NAR

Equity

Homeowners today have record amounts of equity in their home.  According to Corelogic, the average US homeowner’s mortgage balance is just 42% of the value of their home.  This is the lowest average since 2010.

This is in sharp contrast to the crash of 2008, when homeowners were routinely mortgaging 100% or more (!) of their home’s value, leaving them in a precarious situation if values did not continue to increase.  (Spoiler alert:  Property values crashed, folks were upside down on their mortgages, many homeowners simply stopped paying their mortgage and the foreclosure rate skyrocketed, which in turn further brought down the values of across all segments of the market.)

Loan quality

The crash of 2008 was fueled in large part by the extreme availability of credit, to just about anyone with a pulse.  In those days, homeowners routinely took out mortgages without having to document their income or their assets.  Many borrowers had credit scores in the 500s!

The type of loan and quality of borrower have a big impact on the stability of the housing market.  It’s easy to see that the credit profile of today’s mortgages are extremely healthy compared to 15 years ago.

2007 – Less than 33% of all mortgages were held by people with a credit score of 760+

2021 – Nearly 70% of all mortgages are held by people with a credit score of 760+

                Source:  New York Fed Consumer Credit Panel

Not only are today’s borrowers far more creditworthy, but most mortgages today have interest rates that are fixed.  This will help us avoid a sudden Payment Shock wave that we saw around 2008, when millions of adjustable-rate mortgages (ARMs) suddenly adjusted, leading to significant monthly payment increases for millions of homeowners.

Loan profile – Fixed vs. Adjustable

2005 – 34% of all mortgages were ARMs

2021 – Over 95% of mortgages have a fixed rate

                Source:  New York Fed Consumer Credit Panel

Is the market changing?  Yes.  Are mortgage interest rates up?  Yes.  Is the market correcting?  Yes. 

Is the sky falling?  Are we doomed?  No!

It’s easy these days to formulate an opinion based on a soundbite we heard on the radio or a headline we saw as we scrolled.  But something as complex as the housing market will never be explained in a simple sentence or catchphrase – That’s why I’m here! 

In our next newsletter, I’ll explore some of the forecasts from some of the Trade Organizations and other analysts in our industry.  Of course, please don’t ever hesitate to reach out with questions or concerns in the meantime – I am here to help however I can!