Why Today’s Housing Market Is Not About To Crash

Why Today’s Housing Market Is Not About To Crash

Concerns have arisen recently regarding a potential crash in the housing market. Understandably, the housing market's affordability challenges and the media's discussion of a looming recession have contributed to these worries.

However, a careful analysis of the data reveals significant distinctions between today's housing market and the prelude to the 2008 housing crash. This reassurance stems from the following factors

Stringent Loan Requirements: Securing a home loan is much more difficult now compared to the period leading up to the 2008 crisis. In the past, banks had more lenient lending standards, enabling almost anyone to qualify for a mortgage or refinance an existing one. Consequently, financial institutions took on substantial risks in terms of individuals and the mortgage products offered. This resulted in widespread defaults, foreclosures, and declining property values.

Today, potential homebuyers face increasingly higher standards imposed by mortgage companies, as depicted in the graph below. A lower number on the graph indicates a more challenging mortgage approval process, whereas a higher number reflects easier access to mortgages.

Rapid Unemployment Recovery: Although the pandemic led to a surge in unemployment over the past couple of years, the jobless rate has already rebounded to pre-pandemic levels, as indicated by the blue line in the graph below. In contrast, during the Great Recession, a significant number of individuals remained unemployed for an extended period (represented by the red line in the graph).

The swift recovery in employment contributes positively to the housing market. With a large portion of the population gainfully employed, the risk of homeowners experiencing financial hardship and defaulting on their mortgages is significantly reduced. Consequently, the current housing market stands on a stronger foundation, minimizing the possibility of a surge in foreclosures

Scarce Inventory: The housing crisis was exacerbated by an excessive supply of homes for sale, many of which were short sales and foreclosures, leading to a sharp decline in prices. Presently, there is an overall shortage of available housing inventory, primarily due to years of inadequate home construction.

The graph below demonstrates the contrast in months' supply of homes between the current situation and the crash. Currently, unsold inventory stands at a mere 2.6-months' supply, indicating insufficient supply to drive home prices down as they did in 2008.

Record High Equity Levels: The limited availability of homes for sale during the pandemic has exerted upward pressure on home prices. Consequently, homeowners today possess substantial equity, reaching near-record levels, as illustrated in the graph below.

This significant equity position places homeowners in a much stronger position compared to the Great Recession. Molly Boesel, Principal Economist at CoreLogic, explains that "Most homeowners are well positioned to weather a shallow recession. More than a decade of home price increases has given homeowners record amounts of equity, which protects them from foreclosure should they fall behind on their mortgage payments."

In conclusion, the graphs presented should alleviate any concerns you may have about an impending housing market crash. The most recent data unequivocally demonstrates that today's market differs significantly from the conditions leading up to the previous crisis.