Why This Market is Nothing Like 2008
Could we be heading toward another housing market crash like the all-too-memorable one that occurred in 2008?
Short answer: No.
This housing market is nothing like the one that sparked the most devastating recession since the Great Depression. Below are 4 reasons why.
1.) Mortgage Quality
Subprime debt was arguably the single-biggest driver of the GFC. Pre-2008, lenders handed out mortgages more easily than the candy on their desks, and as a result, borrowers received loans they had no business paying off. The typical homebuyer today, however, is extremely creditworthy, with a median credit score of 773 (down from a recent high of 780).
For additional context, a mortgage granted to a borrower with a sub-620 credit score is considered subprime. In the lead-up to the GFC in 2005, the proportion of these mortgages peaked at 14%. Today, we are sitting at under 2%.
2.) Mortgage Types
Combine risky borrowers with sketchy mortgages, and you’ve got a recipe for disaster. The RE bubble in the early 2000s was inflated in many ways by zero-money down mortgages, NINJA loans, interest-only mortgages, negative amortization loans, and various other financial “innovations” that placed incredibly risky assets on banks’ balance sheets. These precarious lending practices are far less common today.
3.) Consumer Debt to Equity Ratio
Thanks to the massive price appreciation that has occurred in recent years, US homebuyers are sitting pretty on a sizeable nest egg of tappable equity. Total mortgage debt in the U.S. is now less than 43% of total home value - the lowest figure on record. Likewise, just 2.5% of homeowners have <10% equity in their homes, highlighting the cushion US borrowers have against going underwater.
4.) Supply & Demand Dynamics
Today’s housing supply is remarkably low by historical standards. Prior to the bursting of the RE bubble in 2008, inventory was ~3.7M. Compare this to the beginning of 2022, when inventory sat at ~860K - a record-low. While this figure has ticked up recently to ~1.3M, it still represents far fewer homes than can meet the current level of demand.
Speaking of market demand, the US population has grown by about 30M people (~10%) since the GFC. At the same time, millennials, which represent the largest generation in the US right now (~85M total), are at peak home-buying age. Compare this to the ~65M members of Generation X that comprised the core pool of buyers 14 years ago.
The upshot? We have far more housing demand now than we did in 2008, and significantly less supply.
This market, therefore, is highly distinct from the one that drove the US off a financial cliff in 2008. While it remains to be seen exactly how market conditions will evolve, one can safely assume we will not experience 2008-caliber market mayhem.
Quote from @Collin Van der Veen:It's Pension Funds, Stocks, Bonds, Jobs, Savings, Cash that will crash. Commodities and hard assets will go up.
Could we be heading toward another housing market crash like the all-too-memorable one that occurred in 2008?
Short answer: No.
This housing market is nothing like the one that sparked the most devastating recession since the Great Depression. Below are 4 reasons why.
1.) Mortgage Quality
Subprime debt was arguably the single-biggest driver of the GFC. Pre-2008, lenders handed out mortgages more easily than the candy on their desks, and as a result, borrowers received loans they had no business paying off. The typical homebuyer today, however, is extremely creditworthy, with a median credit score of 773 (down from a recent high of 780).
For additional context, a mortgage granted to a borrower with a sub-620 credit score is considered subprime. In the lead-up to the GFC in 2005, the proportion of these mortgages peaked at 14%. Today, we are sitting at under 2%.
2.) Mortgage Types
Combine risky borrowers with sketchy mortgages, and you’ve got a recipe for disaster. The RE bubble in the early 2000s was inflated in many ways by zero-money down mortgages, NINJA loans, interest-only mortgages, negative amortization loans, and various other financial “innovations” that placed incredibly risky assets on banks’ balance sheets. These precarious lending practices are far less common today.
3.) Consumer Debt to Equity Ratio
Thanks to the massive price appreciation that has occurred in recent years, US homebuyers are sitting pretty on a sizeable nest egg of tappable equity. Total mortgage debt in the U.S. is now less than 43% of total home value - the lowest figure on record. Likewise, just 2.5% of homeowners have <10% equity in their homes, highlighting the cushion US borrowers have against going underwater.
4.) Supply & Demand Dynamics
Today’s housing supply is remarkably low by historical standards. Prior to the bursting of the RE bubble in 2008, inventory was ~3.7M. Compare this to the beginning of 2022, when inventory sat at ~860K - a record-low. While this figure has ticked up recently to ~1.3M, it still represents far fewer homes than can meet the current level of demand.
Speaking of market demand, the US population has grown by about 30M people (~10%) since the GFC. At the same time, millennials, which represent the largest generation in the US right now (~85M total), are at peak home-buying age. Compare this to the ~65M members of Generation X that comprised the core pool of buyers 14 years ago.
The upshot? We have far more housing demand now than we did in 2008, and significantly less supply.
This market, therefore, is highly distinct from the one that drove the US off a financial cliff in 2008. While it remains to be seen exactly how market conditions will evolve, one can safely assume we will not experience 2008-caliber market mayhem.
Nothing like the 2008 situation. Agreed.
Great post!
I agree with your analysis as well. It's nothing like 2008!
And the #4 reason, Supply and Demand, is the simplest and biggest factor for a more secure Real Estate Market. Boomers are retiring and Millennials are at peak homebuying age. This coupled with RIDICULOUS rent prices equates to a steady Housing Market for years to come.
