How is today’s housing market different from earlier booms and busts

• The housing market is unlikely to collapse, but the momentum could slow, analyst John Wick notes.
• Hot markets with the highest rating may see home prices fall by 10%-20%.
• While a lot has changed with lending since 2008, the behavior of investors and home buyers is very similar.

When discussing the topic of a potential real estate bubble, there has been a common trope that almost immediately rejects the idea that today’s housing market could experience anything like what happened in 2008, says real estate analyst and broker John Wick. Of course, the fallout from the 2008 subprime mortgage crash – and beyond

Recession

It is still fresh in the minds of many people who have bought or sold a home in the past few years.

But are we in another real estate bubble?

“Maybe,” says Wake, who explores and analyzes real estate data through his Substack blog, Real Estate Decoded.

“People always say, ‘It won’t be like 2005,’ ‘Yeah, that’s pretty much for sure,'” he explains. “But we could get into a situation where prices go down by 10% or 20%. It won’t happen this year, but it might happen next year.”

Changes in the mortgage system

Oftentimes, analysts and real estate industry professionals point to the tightening of lending standards since the 2008 crash as another reason not to see a major crash in today’s housing market, but it’s more complex, Wake suggests.

“People say the loans aren’t that bad and we don’t have all the false loans, so we don’t have that much,” Wake says. “But unlike when we had the savings and loan crisis, or the bubble that preceded it in the ’70s, we still have a situation where you have someone creating a mortgage, someone providing mortgage services, someone who owns a mortgage, and that wasn’t the way that She had it before.”

Wake suggests that bubbles since the savings and loan crisis have not only changed the nature of the way loans are created and serviced, but also mean that borrowers face an enormous level of risk.

“It is still in the best interest of servants to foreclose as quickly as possible when someone is left behind,” he explains. “The mechanics of the entire mortgage system tend to close quickly to foreclosure in such accounts, so if we go into a downturn, that’s bad. But the structure that emerged in the savings and loan bubble was that they didn’t want foreclosure; they put it off as long as possible and even They will rent homes for years and wait for prices to come back.”

A combination of record low interest rates, record low inventories, a deluge of stimulus money and a push toward a work-from-home model is often cited as a major reason for the housing boom the country has experienced since the start of the pandemic. However, the tides are turning away from sellers and more in the interests of buyers as inventory increases and sales fall. High inflation and high mortgage interest rates have also reduced the purchasing power of those seeking a home.

Fear of losing price momentum

While the housing market may not be heading for a major crash, there is a very good chance that prices will fluctuate in the coming months. Wake suggests that markets that have seen massive price hikes in the past two years are likely to be the ones experiencing the biggest price corrections in the next two years.

“You can almost look at metros that have gone up a lot and expect to go down a lot,” Wake says, highlighting areas like Austin, Phoenix, and Las Vegas, among others. “The prices won’t go down to where they started.”

This was certainly the case with Metro Phoenix during the run-up to the Great Recession.

“Phoenix is ​​definitely the poster child for what happened in that bubble,” Wake explains. “At the time, there weren’t a lot of institutional investors — they were mom-and-pop investors.” “My theory is that it doesn’t matter where the money is coming from, but if you funnel more money into real estate, prices will just go up because supply is so fixed. But the problem wasn’t supply, it was just an incredible amount of demand because many investors were earning a lot. out of money, and they just want to buy more homes.”

After the 2007-2008 housing crash, prices in Phoenix areas fell more than 50%, largely as a response to overbuilding in an artificially inflated market.

But Wake suggests that one of the key variables that will determine what can happen with home prices in the coming months is momentum. Will investors continue to maintain their big appetite for buying single-family homes and multi-unit properties across the country, or will investors finally fill up?

“You get that momentum where prices are going up for a certain period of time, and then people expect them to go up in the future, so they decide to buy,” Wake says. “But the only thing that can happen is that prices usually stabilize in the summer. So if they stabilize in the summer, which happens long enough, we can really lose that momentum which is part of the upward pressure. And if you don’t have another group of investors coming in, we can really lose that momentum which is part of the upward pressure. To raise prices, then that can really change the market.”

One theme that was undoubtedly similar between the housing boom of the early 2000s and one that occurred during the pandemic was the fear of getting lost, Wake says.

“Going back to the point of the momentum — once prices start going up, and it’s seen as an investment, people might think, ‘OK, it’s a crazy price, but it’s going up really fast,'” Wake explains. “And then, if you’re a regular home buyer, that’s greater fear. It’s not a fear of fear, it’s just a fear of thinking, ‘If I don’t buy now, I’ll never be able to buy a house for the rest of my life!’ In fact, this was a common theme in 2004 and 2005.”