Real Estate Deja Vu?

Many people are talking about the eerie feeling regarding the current housing market.

It could be described as Real Estate déjà vu. Déjà vu is the sense or feeling that one has lived through the current or present situation before.

This all seems too similar.  The last time we had such significant long-term jumps in US housing prices was from 2002-2007 -- right before everything tanked and the bubble burst, seemingly before we realized.

Except it’s not the same.

Not really.  And while there is likely a recession on the horizon – likely in the coming days, it isn’t likely that the housing market will crash in the same fashion that we saw in 2008.

For starters:

Those were vastly different times and the several economic implications that stimulated the crash are not the same as they are today.

Specifically, while we are seeing increases in interest rates, they are still lower than we saw in 2008.  When we look closely, many of the mortgages that were provided by the banks were given to people with less-than-perfect credit, termed “subprime mortgages."   They could often be described as predatory in nature because they were targeting people who were likely to default.

Beginning right before the turn of the millennium, efforts were made to make housing more affordable and achievable to more people.  To do so, mortgage packages were put together for high-risk homeowners with lower down payments, higher (and adjustable) interest rates and unconventional terms.

Essentially the mortgage ended up costing more than what was originally thought leading to homeowner’s inability to pay for their mortgages.  Inability to pay meant homeowners were forced out of their homes necessitating banks to foreclosure and sell the properties.  Often times, they were then sold for a profit due to surging housing market.

As the practices continued, the home prices started to fall so people who foreclosed on their mortgage weren’t even able to get any money back leading to further financial ruin.

Another reason this market is vastly different than 2008 is there continues to be a massive shortage in houses due to a significant demand.

With housing prices continuing to increase from 2000-2005 and more people being able to “acquire a mortgage” significant efforts were made to build new construction at a rapid rate in hopes of turning a profit.  With the default of many mortgages and a slowdown in people being able to afford new builds, there were thousands of new homes for sale.

In the end, (2008) the number of houses available remained the same (surplus) but the demand for them to significantly decline. 

In 2021, there is a huge demand for homes but a relatively low supply.  We see this happening in Florida among the most popular places for new builds – houses can’t be built fast enough!

Comparing 2008 vs. 2021, the driving force between the increase housing prices are vastly different.  In 2008, prices increased because more people were being qualified for mortgages leading to more being capable of buying houses.  In 2021, it is purely a supply and demand situation – low supply, high demand.  Because of these factors, it is significantly less likely that we will see a crash in the same aspect we saw in 2008.

So Why Is a Crash Unlikely?

The soaring prices in the housing market are related to supply and demand as opposed to ability to get mortgages.  In 2008, home buying was made too affordable through aggressive marketers, greedy lenders and often unethical practices.  Home financing is far more stringent in 2021 as compared to the mid-2000s and the values of homes continue to remain high. 

Mortgages were just different.

In the mid-2000s many of the mortgages had seemingly low down-payments leading to significantly higher month-to-month mortgage payments that weren’t clear to homebuyers.  Additionally, many homeowners were pushed to use variable mortgages rate which with increasing interest rates contributed to the inability to pay for loans.

New systems were put in place by the US Government – specifically the Federal Housing Administration or the FHA.  The FHA loan was devised to help mostly new homebuyers and those with bad credit by through insuring a loan and providing better deals on loans.  Further, they provide loans with low down payments, low closing costs and the ability to have insurance on a loan to prevent foreclosures.

Deja Vu?

While certain aspects of the 2008 housing crash have similar characteristics to what we are seeing today, the circumstances and driving forces are vastly different.  The ongoing balance of supply and demand coupled with better regulatory practices put into place should curtail a housing crash.