Why the Housing Market Won’t Crash Like 2008

Many remember the housing crash of 2008, that impacted the lives of countless people. Many now live with the worry that something like that could happen again. But according to Business Insider, although many believe the housing market is at risk of crashing, the economists who study housing market conditions overwhelmingly do not expect a crash in 2024 or beyond.

Here’s why experts are so confident. For the market (and home prices) to crash, there would have to be too many houses for sale, but the data doesn’t show that’s happening. Right now, there’s an undersupply, not an oversupply like the last time – and that’s true even with the inventory growth we’ve seen this year. The housing supply comes from three main sources:

• Homeowners deciding to sell their houses (existing homes)
• New home construction (newly built homes)
• Distressed properties (foreclosures or short sales)

If we look at these three main sources of inventory, it’s clear this isn’t like 2008.

Existing Homes Inventory

Although the supply of existing (previously owned) homes is up compared to this time last year, it’s still low overall. And while this varies by local market, nationally, the current months’ supply is well below the norm and even further below what we saw during the crash.

To illustrate, consider the months’ supply of homes for sale, which measures how long it would take to sell all the current homes on the market given the current sales pace. A balanced market typically has about a 6-month supply. During the 2008 crash, this number soared well above that, indicating a glut of homes for sale. Today, however, this figure remains well below the 6-month threshold. For example, recent data shows that the months’ supply of homes for sale is around 2.5 to 3 months, which is significantly lower than during the crash period.

If you look at the latest data compared to 2008, we only have about a third of that available inventory today. There just aren’t enough homes available to make values drop. To have a repeat of 2008, there’d need to be a lot more people selling their houses with very few buyers, and that’s not the case right now.

Newly Built Homes

People are also talking a lot about what’s going on with newly built houses these days, and that might make you wonder if homebuilders are overdoing it. Even though new homes make up a larger percentage of the total inventory than the norm, there’s no need for alarm. Here’s why.

Data from the Census shows the number of new houses built over the last 52 years. The overbuilding that happened in the lead-up to the crash is evident. In the early 2000s, builders were constructing homes at a breakneck pace, leading to an oversupply by the time the crash hit. However, since the crash, builders have been much more conservative. The post-crash era saw a significant drop in new construction as builders were wary of repeating past mistakes. For example, from 2009 to 2019, the annual number of new homes built was well below the long-term average.

Builders have been underbuilding consistently since then. There’s just too much of a gap to make up. Builders aren’t overbuilding today, they’re catching up. A recent article from Bankrate says that builders remember the crash all too well, and they’ve been cautious about their pace of construction. The result is an ongoing shortage of homes for sale. Even with the recent increase in construction activity, the pace is still measured and controlled, aimed at meeting demand rather than exceeding it.

Distressed Properties

The last place inventory can come from is distressed properties, including short sales and foreclosures. During the housing crisis, there was a flood of foreclosures due to lending standards that allowed many people to get a home loan they couldn’t truly afford.

In the lead-up to the 2008 crash, lending practices were notoriously lax. Subprime mortgages were prevalent, and many borrowers received loans they were not financially equipped to handle. This led to a surge in defaults and foreclosures when the market turned.

Today, lending standards are much tighter, resulting in more qualified buyers and far fewer foreclosures. The Dodd-Frank Act, enacted in response to the crisis, imposed stricter regulations on mortgage lending, ensuring that borrowers are more thoroughly vetted. As a result, the quality of loans has improved significantly. For instance, the average credit score of mortgage borrowers today is much higher than it was during the mid-2000s.

As lending standards got tighter and buyers became more qualified, the number of foreclosures started to go down. And in 2020 and 2021, the combination of a moratorium on foreclosures and the forbearance program helped prevent a repeat of the wave of foreclosures we saw when the market crashed.

While you may see headlines that foreclosure volume is ticking up – remember, that’s only compared to recent years when very few foreclosures happened. We’re still below the normal level we’d see in a typical year. For example, while foreclosure filings have increased compared to the historically low levels during the pandemic, they remain below the average levels seen in the years preceding the pandemic.

Inventory levels aren’t anywhere near where they’d need to be for prices to drop significantly and the housing market to crash. As Forbes explains, “As already-high home prices continue trending upward, you may be concerned that we’re in a bubble ready to pop. However, the likelihood of a housing market crash—a rapid drop in unsustainably high home prices due to waning demand—remains low for 2024.”

Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), reinforces this view: “We will not have a repeat of the 2008–2012 housing market crash. There are no risky subprime mortgages that could implode, nor the combination of a massive oversupply and overproduction of homes.”

The conditions that led to the 2008 crash simply do not exist today. The housing market, while facing its own set of challenges, is not on the brink of a similar crisis. With a controlled pace of new home construction, tighter lending standards, and a lower overall inventory of homes for sale, the market is fundamentally more stable and resilient. So, while it’s always wise to stay informed and cautious, there’s little reason to fear a repeat of the housing crash of 2008.

If you have real estate questions, I have answers! Karen Daugerdas, Coldwell Banker REALTOR®, 847.494.1102, karen.daugerdas@cbrealty.com