Why Today's Housing Inventory Doesn't Indicate a Crash

Even if you didn't own a home at the time, you may recall the 2008 housing meltdown. If you're afraid of a rerun of what happened in 2008, there's good news: the housing market now is not the same as it was in 2008.

One significant cause is a lack of available properties for sale. That suggests there is an undersupply, not an overabundance as there was previously. The market would have to implode if there were too many houses for sale, but the evidence shows that this is not the case.

Housing supply comes from three main sources:

• Homeowners deciding to sell their houses
• Newly built homes
• Distressed properties (foreclosures or short sales)

Here's a closer look at today's housing inventory to see why it's not like it was in 2008.

Homeowners Deciding To Sell Their Houses

Although housing supply did grow compared to last year, it’s still low. The current month's supply is below the norm. The graph below shows this more clearly. If you look at the latest data (shown in green), compared to 2008 (shown in red), there’s only about a third of that available inventory today.

So, what does all of this mean? There just aren't enough homes available to cause property values to fall. To have a recurrence of 2008, there would need to be a lot more people selling their homes with few buyers, which isn't happening right now.

Newly Built Homes

People are also talking a lot about what's going on with newly built houses these days, which may lead you to worry if homebuilders are going beyond. The graph below shows the number of new houses built over the last 52 years:

The 14 years of underbuilding (shown in red) are a big part of the reason why inventory is so low today. Basically, builders haven’t been building enough homes for years now, and that’s created a significant deficit in supply.

While the final blue bar on the graph shows that it’s ramping up and is on pace to hit the long-term average again, it won’t suddenly create an oversupply. That’s because there’s too much of a gap to make up. Plus, builders are being intentional about not overbuilding homes like they did during the bubble.

Distressed Properties (Foreclosures and Short Sales)

The last source of inventory is distressed properties, such as short sales and foreclosures. During the housing crisis, there was a wave of foreclosures as a result of lending regulations that allowed many people to obtain a home loan that they couldn't properly afford.

Today, lending standards are much tighter, resulting in more qualified buyers and far fewer foreclosures. The graph below uses data from the Federal Reserve to show how things have changed since the housing crash:

This graph shows that as lending criteria tightened and purchasers became more eligible, the number of foreclosures began to decrease. In 2020 and 2021, the combination of a foreclosure moratorium and the forbearance program helped avert a repeat of the flood of foreclosures that occurred around 2008.

The forbearance program was a game changer, providing homeowners with previously unavailable options such as loan deferrals and modifications. And data on the success of that program shows four out of every five homeowners coming out of forbearance are either paid in full or have worked out a repayment plan to avoid foreclosure. These are a few of the biggest reasons there won’t be a wave of foreclosures coming to the market.

What This Means for You

Inventory levels aren’t anywhere near where they’d need to be for prices to drop significantly and the housing market to crash. According to Bankrate, that isn’t going to change anytime soon, especially considering buyer demand is still strong:

“This ongoing lack of inventory explains why many buyers still have little choice but to bid up prices. And it also indicates that the supply-and-demand equation simply won’t allow a price crash in the near future.”

Bottom Line

There aren't enough available homes on the market to prevent a replay of the 2008 housing crisis, and nothing indicates that this will improve anytime soon. That is why housing inventory indicates that there is no impending crash.