Why the Current Housing Market Will Not Crash
67% of Americans say a housing market crash is imminent in the next three years. With all the talk in the media lately about shifts in the housing market, it makes sense why so many people feel this way. But there’s good news. Current data shows today’s market is nothing like it was before the housing crash in 2008.
Back Then, Mortgage Standards Were Less Strict
During the lead-up to the housing crisis, it was much easier to get a home loan than it is today. Banks were creating artificial demand by lowering lending standards and making it easy for just about anyone to qualify for a home loan or refinance an existing one.
As a result, lending institutions took on significantly more risk in terms of both the individual and the mortgage products offered. That led to mass defaults, foreclosures, and falling prices. Today, things are different, and purchasers face much higher standards from mortgage companies.
The graph below uses data from the Mortgage Bankers Association (MBA) to help tell this story. In this index, the higher the number, the easier it is to get a mortgage. The lower the number, the harder it is.
This graph also shows how much has changed since the time when credit was easiest to get, just before the financial crisis. As a result of tighter lending standards, a situation that could have led to a wave of foreclosures as in the past has been avoided.
Foreclosure Volume Has Declined a Lot Since the Crash
Another difference is the number of homeowners who were facing foreclosure when the housing bubble burst. Since the crash, there have been fewer foreclosures. This is mostly because buyers today are better qualified and less likely to not pay back their loans. The graph below uses data from ATTOM to show the difference between last time and now:
So even as foreclosures tick up, the total number is still very low. And on top of that, most experts don’t expect foreclosures to go up as drastically as they did following the 2008 crash. Bill McBride, the founder of Calculated Risk, explains the impact a large increase in foreclosures had on home prices back then—and how that’s unlikely this time.
“The bottom line is there will be an increase in foreclosures over the next year (from record level lows), but there will not be a huge wave of distressed sales as happened following the housing bubble. The distressed sales during the housing bust led to cascading price declines, and that will not happen this time.”
The Supply of Homes for Sale Today Is More Limited
For historical context, there were too many homes for sale during the housing crisis (many of which were short sales and foreclosures), and that caused prices to fall dramatically. Even though there are more homes on the market now than there were at the beginning of the year, there is still a shortage of inventory overall. This is mostly due to years of underbuilding homes.
The graph below uses data from the National Association of Realtors (NAR) to show how the months’ supply of homes available now compares to the crash. Today, unsold inventory sits at just 2.7 months’ supply at the current sales pace, which is significantly lower than the last time. There just isn’t enough inventory on the market for home prices to come crashing down like they did last time, even though some overheated markets may experience slight declines.
If recent headlines have you worried about another housing crash, the data above should help put your mind at ease. Expert opinions and the most recent data demonstrate conclusively that today's market is nothing like it was previously.