Last March, many involved in the residential housing industry feared the market would be crushed under the pressure of a once-in-a-lifetime pandemic. Instead, real estate had one of its best years ever. Home sales and prices were both up substantially over the year before. 2020 was so strong that many now fear the market’s exuberance mirrors that of the last housing boom and, as a result, we’re now headed for another crash. ­­­

However, there are many reasons this real estate market is nothing like 2008.

1. Mortgage standards are nothing like they were back then.

During the housing bubble, it was difficult not to get a mortgage. “Significant space remains to safely expand the credit box. If the current default risk was doubled across all channels, risk would still be well within the pre-crisis standard of 12.5 percent from 2001 to 2003 for the whole mortgage market.”

2. Prices aren’t soaring out of control.

The left first graph shows annual home price appreciation over the past four years compared to the four years leading up to the height of the housing bubble. Though price appreciation was quite strong last year, it’s nowhere near the rise in prices that preceded the crash.

3. We don’t have a surplus of homes on the market.

We have a shortage. The months’ supply of inventory needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued appreciation. In 2007, for example, there were too many homes for sale, and that caused prices to tumble. Today, there’s a shortage of inventory, which is causing an acceleration in home values.

4. New construction isn’t making up the difference in inventory needed.

Some may think new construction is filling the void. However, if we compare today to right before the housing crash, (graph #2), we can see that an overabundance of newly built homes was a major challenge then, but isn’t now. 5. Houses aren’t becoming too expensive to buy. As Mark Fleming, Chief Economist for First American, explains: “Lower mortgage interest rates and rising incomes correspond with higher house prices as home buyers can afford to borrow and buy more. If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home. Looking back at the bubble years, house prices exceeded house-buying power in 2006, but today house-buying power is nearly twice as high as the median sale price nationally.” (Graph #3) 6. People are equity rich, not tapped out. In the run-up to the housing bubble, homeowners were using their homes as personal ATM machines. Many immediately withdrew their equity once it built up, and they learned their lesson in the process. Prices have risen nicely over the last few years, leading to over 50% of homes in the country having greater than 50% equity – and owners have not been tapping into it like the last time.

Bottom Line – If you’re concerned that we’re making the same mistakes that led to the housing crash­­, take a look at the charts and graphs above to help alleviate your fears.

Public Service Message brought to you by “Keeping Curent Matters”

and Angel Chizzoniti, Douglas Elliman