Are We Headed Towards Another Housing Crash?
Background
Since the start of the Covid pandemic in March 2020, home prices are up a staggering 45% – according to the National Association of Realtors. Sellers have enjoyed a wildly imbalanced market for the past couple of years, while buyers have been forced to offer well over asking price and waive all contingencies in order to have a competitive offer.
The last time the real estate market was this hot was in 2007, just before the real estate bubble burst – triggering a foreclosure crisis and a global recession. With soaring inflation and another recession looming, homeowners and investors are all asking the same question.
Are we headed toward another real estate crash? The short answer is no.
Rising interest rates have started to slow the record-breaking market, but today's real estate market is fundamentally different from that of 2007 in a few key ways.
Housing Shortage
The most significant factor driving home prices up is the simple fact that we have a shortage of homes available. The National Association of Realtors recorded a home shortage of 5.5 million in May, a gap they say would take over a decade to close.
In a perfectly healthy market, economists estimate that there would be about a 6 month supply of homes. Meaning it would take 6 months for all the homes on the market to be sold. Throughout the past couple of years, supply has been closer to 1.5 to 2 months.
With a lack of existing homes, the simple supply/demand imbalance is going to prevent a significant fall in home prices.
Why is there such a shortage of homes?
Building Costs and Delays
After the Great Recession of 2008, many home builders pulled back production levels significantly. When the covid pandemic began, most industries came to a screeching halt, resulting in long delays for materials like steel and lumber and skyrocketing costs.
According to the Bureau of Labor Statistics, overall construction prices are up over 35% since the start of the pandemic. Additionally, while the construction industry was on pause, many out-of-work contractors transitioned to more stable industries to find work and have not returned. It's hard to build homes if you can’t get the materials you need or the labor to work. Builders are generally over budget and behind schedule on existing projects, so lack of inventory will continue to be a problem.
Type of Loans
The lead-up to the housing crash of 2007-08 was fueled by the infamously loose lending practices of the early 2000s. Thanks to complex financial engineering and predatory lending practices, lenders offered mortgages to almost anyone – regardless of down payment or credit history.
Today, buyers must meet strict requirements to qualify for a loan, and those who are getting loans have record-high credit. Only 8% of loans today are adjustable, compared to 37% in 2007, which left borrowers open to jumping payments and eventual foreclosures.
Following the crash of 2008, foreclosures flooded the housing market diluting home prices even further. Today, most homeowners have a large equity cushion and foreclosure rates remain low – hitting an all-time low in 2020 with only 0.16% of homes reaching foreclosure.
Buyer Demographics
Work from home policies, restricted international travel, and general pandemic policies all encouraged home buyers to look for larger and nicer homes and increased demand for vacation and second homes. The pandemic also coincided with a large portion of the population, millennials, coming into prime home-buying years.
The National Association of Realtors estimates that about 31% of home purchases are first-time homebuyers, most of which are under 40. Even if homebuilders can increase production in the next few years, Gen Z buyers will soon be entering the home buying market increasing the buyer pool even further. This growing block of young homebuyers will continue to be a high floor for housing demand and a buffer of home values against a struggling economy.
Conclusion
Despite waning buyer demand – the current housing shortage, inventory backlog, strength of loans, and forecasted amount of future buyers will continue to be a hedge against a market crash. Even while national housing trends weaken, growing markets like Chattanooga and Nashville will likely be insulated from the harshest adjustments coming.
So, while competition for homes may be beginning to rebalance, don’t expect to see home values retreat to pre-pandemic prices – especially here in Tennessee.