The 2022 Housing Market Is Different Than 2008. Will It Still Crash?

The 2022 Housing Market Is Different Than 2008. Will It Still Crash?

Roger Pettingell Sarasota Real Estate

As home prices continue to soar to record highs, the inevitable comparisons to the 2008 housing bubble and predictions of another housing market crash have already started to swirl. While it may seem strange to see real estate prices go up even as mortgage rates climb to their highest levels in more than a decade, the parallels to 2008 mostly end there.

The 2022 housing market is largely predicated on the mismatch between the demand and supply of homes. Homes simply aren’t being built fast enough to match demand. As interest rates fell to zero when the pandemic first began, a new wave of hopeful homeowners hit the market, buying up property. Many economists believe there is still a sort of pent-up demand for homes lingering.

The mechanics behind today’s housing market growth are fundamentally different than what happened in 2007 and 2008. Back then, home prices skyrocketed due to an unprecedented explosion in the subprime mortgage market. Banks were giving loans to nearly everyone. In many instances, lenders would completely skip due diligence lending practices like income verification and credit score requirements. As such, the housing market became propped up by these risky, variable-rate, subprime mortgages. As millions of Americans defaulted on their loans in 2007-2008, the subprime bond market collapsed, sending the the wider economy into a recession.

Today’s housing market is the result of organic supply and demand, facilitated by market forces.

Will the Housing Market Crash?

Understanding whether the housing market may crash starts at understanding why the market would crash to begin with. In the early 2000s it crashed in response to artificially high prices that investors realized were wholly unjustified. In 2022, largely due to 2008 crash, lending laws are much tighter. Borrowers aren’t at widespread risk of default, and malicious lending practices aren’t inflating home prices. Indeed, the housing market of today is a result of the limited inventory of homes available.

Currently the U.S. contains a roughly two-month supply of available homes for sale, well below the six-month historical level. When the pandemic hit, the demand for homes surged, but the construction of homes fell dramatically. Global supply constraints on lumber and metal further slowed the rate of home construction, putting upward pressure on prices.

The median home sale price in May was $430,000, up 15% from the same month last year. Notably, the housing market is continuing to grow month over month, even as 30-year fixed mortgage rates trend over 5%.

As lending rates rise, the demand for homes should naturally decrease. This year, however, the supply of homes has been so pinched, any drop in demand stemming from the high lending rates has been overshadowed by the lack of homes available. This is why home prices have been so stubborn, and also why the housing market isn’t at any immediate risk of collapse.

That doesn’t mean prices will remain elevated forever.

Will Home Prices Ease in 2022, 2023?

While housing has remained resistant this year, there are already signs that a cooling — rather than a crash — is on the way. As mortgage rates continue to rise, the demand for homes will likely rebalance with supply to some degree, lowering prices, or, at the very least, slowing price growth.

A new Redfin report from June noticed a 24% drop in mortgage applications from the same time last year. At the same time, the number of property tours and “homes for sale” Google searches are also down year over year. Sellers have even started to mildly lower their asking prices out of fear of an impending recession — though homes are still frequently selling over list price.

Redfin Chief Economist Daryl Fairweather believes the data reflects a slowly changing sentiment towards housing.

Data on home-tours, offers and mortgage purchase applications suggest that homebuyers have noticed the shift in power and are no longer leaving the market in droves. Buyers coming back will provide support to the housing market, but between now and the end of year I think the power will continue to shift towards buyers, resulting in mild price declines from month to month.

It’s clear the current housing market growth is unsustainable. While a crash akin to the 2008 recession is more dramatic than it is reasonable, cooling home prices through 2023 remains a distinct possibility in the face of rising mortgage rates.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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