Why a Housing Crash is Unlikely

If you're waiting for the housing market to crash and lower home prices, here's what the data indicates. Spoiler alert: a crash doesn't seem likely. According to experts, home prices are expected to continue rising.

Today’s market is very different than it was before the housing crash in 2008. Here’s why.

It’s Harder To Get a Loan Now – and That’s Actually a Good Thing

Securing a home loan was significantly easier during the period leading up to the 2008 housing crisis compared to now. Previously, banks applied looser lending standards, allowing almost anyone to qualify for a home loan or refinance.

Today, the situation has changed. Mortgage companies have implemented stricter criteria for homebuyers. The following graph, based on data from the Mortgage Bankers Association (MBA), illustrates these differences. A lower score on the graph indicates increased difficulty in obtaining a mortgage, while a higher score signifies easier access:

a graph showing a line going up

The graph's peak indicates that lending standards were much looser back then compared to today. This means that lending institutions assumed significantly higher risks with both borrowers and the mortgage products they offered around the time of the crash. This resulted in widespread defaults and a surge of foreclosures entering the market.

There Are Far Fewer Homes for Sale Today, so Prices Won’t Crash

During the housing crisis, an excessive number of homes were on the market, including many short sales and foreclosures, which dramatically drove down home prices. Today, however, the situation is quite different, with a notable shortage of inventory rather than a surplus.

The graph below, utilizing data from the National Association of Realtors (NAR) and the Federal Reserve, illustrates the current months’ supply of homes available (shown in blue) compared to the supply during the crash (shown in red):

a graph of a number of people

Today, unsold inventory sits at just a 3.0-months’ supply. That’s compared to the peak of 10.4 month’s supply back in 2008. That means there’s nowhere near enough inventory on the market for home prices to come crashing down like they did back then.

People Are Not Using Their Homes as ATMs Like They Did in the Early 2000s

During the buildup to the housing crash, many homeowners were leveraging the equity in their homes to finance extravagant purchases like new cars, boats, and vacations. However, as home prices began to drop due to excessive inventory, many found themselves with negative equity.

Contrastingly, today's homeowners are exercising greater caution. Despite significant increases in home prices over recent years, they are not tapping into their home equity as aggressively as before.

According to Black Knight, tappable equity — the amount homeowners can access while keeping their loan-to-value ratio (LTV) below 80%

 a graph of a growing graph

That means, as a whole, homeowners have more equity available than ever before. And that’s great. Homeowners are in a much stronger position today than in the early 2000s. That same report from Black Knight goes on to explain:

“Only 1.1% of mortgage holders (582K) ended the year underwater, down from 1.5% (807K) at this time last year.”

And since homeowners are on more solid footing today, they’ll have options to avoid foreclosure. That limits the number of distressed properties coming onto the market. And without a flood of inventory, prices won’t come tumbling down. 

Bottom Line

While you might be wishing for a drop in housing prices, the data suggests otherwise. Current research clearly indicates that today's market is fundamentally different from what it was before.

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