In January 2023, existing home sales declined for the twelfth consecutive month, leaving many fretting if history would repeat itself from 15 years ago. With some similarities, it's hard not to compare today's housing market to the 2008 housing crash; however, experts have stressed that the market will not face the same fate. Instead, it is experiencing a course correction, presenting an excellent opportunity for long-term homeowners.
Correction vs. Crash
A correction, compared to a crash, is less far-reaching or severe. For instance, during a crash, prices fall below the debt owed from mortgages, leading to foreclosures. Much of this can be attributed to over-leveraging borrowers when their debt far exceeds equity on a property. This time, experts predict that foreclosures will remain historically low in today's market, at 0.6%, versus 4.6% during the housing crash. During a correction, the market will endure an unusual price growth, followed by a decline of around 5 percent. It is also a prime buying opportunity with inventory rising and less competition.
Why Experts Say this is Different from 2008
Leading up to the 2008 crash, between 2002 and 2005, there was a massive sale boom, something that has not been replicated. While some may point to the Covid-19 pause/rebound boom, it's important to note this was within a year and has since leveled out. Another element of a crash is an exponential job loss rate; previous crashes reported a loss of nearly 8 million jobs in a single year. While the technology industry is facing a substantial period of layoffs, it has not accumulated enough to form a net job loss.
Lessons Learned
In the last 15 years, the industry has taken appropriate precautionary measures to protect citizens. Acknowledging that credit expansions played a significant role in foreclosures, the 2005 Bankruptcy Reform Laws and Qualified Mortgage Laws were enacted. While controversial for some, Bankruptcy Reform Laws made filing for bankruptcy more difficult, expensive and less financially advantageous, deterring people from pursuing it. What followed was a decline in interest rates and Qualified Mortgage Laws. Intended to protect lenders by assessing borrowers' ability to pay closed-end residential mortgage laws, it has made subprime and risky loans nonexistent in the market.
As mentioned in our previous blog, the industry has learned to revise loan details and regulate the number of new home constructions. For example, new construction is at 4.6 million, compared to 7.65 million in 2008. Though because of the low inventory, buyers are hit with rising prices.
Ride the Wave
The following two years will be fundamental to the market, something to remember before making rash decisions. For instance, the backlog of new construction will be a major factor in reshaping the market, with some areas seeing stable prices because of the scarcity. It's also important to watch interest rates and inflation, which may benefit from the backlog.