Real Estate Trends – Are We Looking At Another 2008 Style-Market Crash?

2008, It was a year that saw the fall of major investment banks like Lehman Brothers, followed by an economic recession that forced millions of Americans into foreclosure. The housing market plunged into chaos, leaving many asking if it could happen again.

The mismanagement and fraud that led to the crash of 2008 were unique and unlikely to be repeated, yet there are some warning signs worth paying attention to. From a recent rise in mortgage delinquencies to a sluggish economy and lack of real wage growth, could things fall apart again?

One thing is certain: America’s housing market has shifted since 2008. Home values have bounced back, and, the diligence of lenders and improvements in the job market have helped keep mortgage delinquencies low.

However, some experts are predicting the market to go down in the near future. On the other hand, many trends show that prices are likely to go down, but the crash of 2007-2008 isn’t likely to be repeated. Let’s look at the trends behind the real estate market today.

The Crazy Market

The pandemic and the post-pandemic market have been nothing short of crazy. People are now searching for larger homes that can accommodate remote work and home school needs, driving up demand. This has caused an increase in prices, leading to bidding wars and prices going above market value in some areas.

While most of the demand has been due to needs, a large part can also be attributed to increased spending power due to government measures like stimulus checks. The market is expected to correct itself and the downward correction has begun in some areas.

The average price is down from $418,000 in June of 2022 to $379,100 in October of 2022. It’s likely that this trend will continue till 2024. However, the general decrease is expected to be 20-25% as stated by Morgan Stanley. It is for sure that correction is needed, but it is highly unlikely that this will lead to a crash like the one seen in 2008.

Mortgage Rates

The historically low mortgage rates have risen to 7% from the pandemic low of 3%. With the increase, there is a fear that it will lead to higher mortgage payments and less home affordability. However, this doesn’t seem to be true as many lenders are providing mortgages with lower interest rates. Moreover, since homes have become more expensive, people are looking for ways to pay less each month by taking out larger loans over longer terms. The average loan term has increased from 30 years in 2008 to 35 years now.

However, it has also led to fewer buyers as the increase in rates has made it difficult for buyers to keep up with payments. This, along with an increase in student loan debt and lack of real wage growth, is dampening the market.

However, despite the above two trends, there are 4 reasons which make it highly unlikely that we will see another crash like 2008.

Lending Practices

The lending practices in the US have become stricter since 2008. Lenders are now required to review borrowers’ financial histories and credit scores more carefully before making a loan decision. This makes it difficult for those with less-than-stellar credit to get a mortgage, which has led to fewer risky loans being made.

Since the crash of 2008, many regulations have been implemented in order to prevent another market collapse. The Dodd–Frank Wall Street Reform and Consumer Protection Act was put into place in 2010, which created numerous regulations and restrictions on banks in order to protect consumers against fraud and predatory lending.

We are not seeing any trend of over-leverage, which is a key factor in creating an unstable market.

Low Inventory

The ever-existing problem of the US housing market is the lack of inventory. Even during the pandemic and following times when demand was high, the number of homes constructed has not increased by much. This has caused an imbalance between supply and demand and pushed prices up in the market.

As a result, the buffer against a crash is still quite strong due to the limited availability of homes. This trend is expected to continue for the foreseeable future, as building new homes involves numerous regulations and costs which have risen significantly over time. 

The New Demographic Trends

The US population is aging and more and more people are choosing to stay in their current homes. Due to this, fewer and fewer people are selling their homes which further reduces the inventory. This has caused an increase in demand as younger homebuyers cannot find enough properties to purchase.

Along with this, the new buyer in the market has a different approach to buying a home. Millennials are now the largest demographic in the US and they prefer to rent rather than buy. This also lowers supply as landlords have fewer incentives to sell their properties due to the lack of buyers. It might seem like a problem, but it is actually providing stability to the market.

Very Low Foreclosure Activity

In 2008, the foreclosure rate was at an all-time high. However, since then, there has been a consistent decrease in foreclosures due to stricter lending practices and government regulations that protect consumers from predatory lenders. This means that people are more likely to keep up with their mortgage payments, thus providing stability to the market.

Even today, there are no trends of high foreclosure rates in any part of the country. This is a sign that people are managing their finances better and have become more responsible with mortgages, which increases stability.

In conclusion, despite some looming questions on the horizon such as increased student loan debt and lack of real wage growth, it’s highly unlikely that we will be seeing another housing market crash like 2008 in the near future.

The regulations put into place since then, along with other demographic trends such as the aging population, low inventory, and very low foreclosure rates all provide some form of stability to the market. Therefore, while there might be fluctuations in prices as a correction takes place, a full-blown crash seems highly unlikely.

For all those who are planning to buy or sell in the near future, it is important to an eye on the market trends and be prepared for any changes that might occur. Doing research and having a plan for any unexpected events can help you make the best decision possible it comes to real estate.