If you’re curious about the state of the current real estate market, some recent headlines would lead you to believe that the sky is falling — again. Recent internet searches found these articles from Newsweek, The Street and Medium, respectively.
“‘Massive’ Housing Bubble About to Burst, Real Estate Expert Warns.” “Is there a Housing Bubble on the Horizon?” “Why the Upcoming HOUSING CRASH Will Be WORSE than 2008!”
While these dire predictions may generate a lot of anxiety and attention, they aren’t reflective of the reality of today’s real estate market. In fact, the landscape of the 2008 market was very different from that of today’s market, which makes these alarmist comparisons dubious.
“There are some fundamental differences in terms of regulation and consumer behavior in today’s market that make a repeat of 2008 unlikely.”
There are some fundamental differences in terms of regulation and consumer behavior in today’s market that make a repeat of 2008 unlikely. But, first, let’s look back at what was happening in 2008 that led to the monumental crash.
Troubled moment
The real estate market in 2008 was afflicted with weaknesses that may seem glaring in hindsight but were heedlessly overlooked during that era’s housing boom. Those weaknesses included a lack of oversight and regulation, ill-advised lending to unqualified borrowers and general industry volatility.
After the 2001 recession, monetary policy shifted to help make access to credit easier and more affordable. This contributed to very low interest rates and a very laissez-faire approach to mortgage lender oversight.
This relaxed environment contributed to the introduction of extremely low, teaser rate variable mortgages. Many of these mortgages had rates of 0%-2% that were fixed only for the first couple of years, which tempted many people to buy property when they weren’t financially prepared for it. In other scenarios, loan terms that carried prepayment penalties for three years with a two-year adjustable rate automatically increased at the start of the third year.
When the market soured, those interest rates rose so rapidly that many new homeowners found themselves quickly underwater on their mortgages with no obvious way to escape. That’s a stark comparison to this environment now, where equity gains in most areas were very substantial to most.
The lack of regulation also contributed to the entry of unprincipled lenders into the marketplace who, in their quest for quick capital, made loans with low, variable interest rates to unqualified borrowers, creating a precarious segment of the market destined for instability.
When interest rates started to rapidly increase, those mortgages quickly became unaffordable to the buyers, leaving them with unsellable homes and badly damaged credit ratings. The situation was even more dire for people who owned multiple properties.
As the instability of that market increased, several larger lending institutions exited the market, causing many of their subsidiary lenders to collapse. The exodus was so significant that a website called the Implode-O-Meter tracked the list of affected companies. The upshot of all this was a market with a shrinking number of reliable lenders and a sea of underwater property owners with few readily available options for rebuilding their finances.
Notable differences
One of the most notable differences between today’s real estate market and that of 2008 is the introduction of numerous regulations following the crash, aimed at addressing the weaknesses and questionable practices that contributed to the collapse.
When Congress passed the Mortgage Disclosure Improvement Act in 2008, it required lenders to provide prospective borrowers with more accurate, proactive information on how variable rate mortgages worked, the risks they entailed and the true borrowing cost. Additionally, it required lenders to give consumers more time to consider loan terms. This act significantly reduced the questionable lending practices that had previously caused many people to take on loans they didn’t fully understand and couldn’t afford.
One of the most significant pieces of legislation introduced to rehabilitate the financial markets was the Dodd-Frank Act, which also established the Consumer Financial Protection Bureau (CFPB). The watchdog agency oversees the services and products that banks and lenders offer to consumers. It enforces ethical practices in the financial services market and educates consumers on how to repair their credit and avoid similar pitfalls in the future.
The legislation known as TRID combined elements of the Truth in Lending Act and the Real Estate Settlement Procedures Act into a unified set of rules governing fees, expenses and timelines for buying property. It offers consumers much clearer and more detailed information about what they need to know and what is required when purchasing real estate. With now 15 or more years for this overhaul of regulation to take effect, it has made a significantly positive impact, marking one of the major differences between 2008 and today’s landscape.
Consumer concerns
After the COVID-19 pandemic, interest rates were abnormally low to help stimulate economic activity. When inflation began to rise, those artificially low rates were quickly raised in response, causing concern for many consumers. The calendar year of 2022 started at 3.22% and ended at 6.42%, which ultimately initiated the conversation of “another 2008” from many industry professionals and consumers alike.
Despite what the headlines portray and some consumers believe, today’s interest rates are actually quite normal given the state of the economy. The expectation is that they may start slightly dropping later this year, which is an indicator of greater stability, both in the general economy and in the real estate market.
“Despite what the headlines portray and some consumers believe, today’s interest rates are actually quite normal given the state of the economy.”
Some observers point to the fact that today’s slightly higher interest rates and high home prices are indications of weakness in the real estate marketplace. But if you look more closely at the data, you can see these are normal responses to predictable market changes.
During COVID, when interest rates were slashed, there was a surge in homebuying activity, depleting much of the existing inventory of new homes. After the pandemic, as interest rates rose again, the limited supply of homes contributed to increased real estate prices.
Today, many homeowners are opting to stay in their current homes rather than seek new ones because they want to keep their 2.5% or 3% interest rates. They’re also put off by the higher prices for new homes. This contrasts starkly with the situation in 2008, when many were trapped due to being underwater on their mortgages and facing severely damaged credit or worse.
Stable market
When considering the current real estate market, there are two key take-aways for consumers. First, it’s crucial for your clients to consider carefully when entering the market for the first time or moving into a new home.
You should help your clients gather as many facts as they can about their options and how those options align with their financial situation. The right decision is an informed decision. It’s best that your clients use data to take another look at the landscape to arrive at the best conclusion for themselves.
Additionally, if they’re waiting for a significant drop in interest rates or home prices, it may not be wise. While interest rates could potentially drop in the future, major shifts in rates or home prices are unlikely in the near term. So, depending on their situation, now may be a very good time to act. Moreover, concerns about comparisons between today’s real estate market and that of 2008 shouldn’t deter your clients. Today’s market is much more regulated and stable than it was during that period.
