The ‘critical difference’ between the housing market now and the crash of 2008: an expert
While falling home prices and home sales spur talk of a possible collapse of the US housing market, two experts highlighted what they said was a “critical difference” between the market now and the mid-2000s.
When the housing market collapsed in 2008, near the end of that decade, it led to an economic crisis that became known as the Great Recession. Philip Carlson Szlizak and Paul Schwartz wrote in an article published by luck Tuesday.
Carlson-Zelezak is the chief global economist and general manager of the Boston Consulting Group and a partner in the firm’s New York office. Schwartz is a senior economist and director at the Henderson Institute for Boston Consulting Group.
Consumer confidence in the US housing market has fallen to its lowest level since 2011, according to the results of the Fannie Mae Home Buying Confidence Index (HPSI) released on Monday. The government-sponsored organization said the survey results show consumers are becoming increasingly pessimistic about buying and selling conditions in the US market.
“The HPSI has fallen steadily for most of the year, as high mortgage rates continue to weigh on housing affordability,” Doug Duncan, senior vice president and chief economist at Fannie Mae said in a statement. “Unfavorable mortgage rates are increasingly cited by consumers as a primary reason behind the growing perception that it is a bad time to buy and sell a home.”
“Overall, this month’s HPSI results appear to confirm our expectations of a reduction in home sales over the next year,” he added.
The supply of housing in the US plays an important role in whether the market collapses.
A housing bubble typically begins with an increase in housing demand that coincides with limited inventory, which can lead to higher home prices, according to the financial website Investopedia. This increase in demand occurred during the COVID-19 pandemic.
According to the US Census Bureau, the market halted raucously during the initial close in March 2020 but rebounded that summer. While inventory improved that summer, it failed to keep pace with sales growth. In addition, Zillow research data showed that there were fewer homes for sale in 2020 than in 2019, creating “extremely competitive conditions” in the home buying market, the bureau explained.
A housing bubble can burst when demand decreases or stagnates even while supply has increased due to the previous jump in demand, according to Investopedia. This can cause home prices to fall sharply when the new supply of homes lacks buyers willing or able to pay the higher costs.
But Carlsson-Szlezak and Swartz note that there is still not enough housing in the United States.
“Low home inventories today are consistent with continued construction activity even on the back of higher interest rates, because the risk of not being able to sell homes when there is little in the market is lower,” they wrote.
A Freddie Mac report released in 2021 found that the housing supply deficit increased by about 52 percent between 2018 and 2020, with a deficit of 3.8 million as of the fourth quarter of 2020.
Additionally, a recent analysis by Up For Growth found that more than half of U.S. metropolitan areas had a home supply shortfall in 2019 even before the pandemic, CBS reported.
By comparison, a chart from the Federal Reserve Bank of St. Louis showed that the housing supply rose sharply from 2005 to 2008.
Even if the housing market collapsed, experts questioned whether it would match the severity of the 2008 economic downturn.