While some headlines scream “Crash Imminent!” largely to gain attention, the reality of the housing market is quite different. Here’s a breakdown of why a housing market crash is unlikely:
Supply and Demand
Remember basic economics? A healthy market has a balanced supply and demand. During the 2008 housing crash, the market was flooded with homes, with over 11 months’ supply available. In contrast, as of May 2024, we have approximately 3.7 months’ supply. Although this is an increase from 3.1 months a year ago, it is still significantly lower than the 5-6 months typically seen in a balanced market (NAR). Limited supply often drives up prices.
To illustrate, there were 1.28 million existing homes available for sale in May 2024, compared to 3-4 million during the 2007-08 period (NAR). Additionally, the strong labor market continues to bolster demand. Unemployment rates remain historically low, and wages are rising. Millennials and Gen Z are rapidly forming new households, while affluent baby boomers are reluctant to sell their homes, supported by stock market gains and savings.
As new households emerge and housing construction struggles to keep pace, the persistent shortage in supply remains. The current gap between demand and supply is several million homes, with no signs of diminishing in the near future.
Strong Financial Footing for Homeowners
Unlike the housing glut of 2008, the current market is characterized by a significant shortage of available homes. Many homeowners are choosing to stay put, benefiting from the historically low mortgage rates they locked in previously. Approximately 57% of homeowners with a mortgage have a contract rate below four percent, giving them little incentive to sell and purchase a new home at rates approaching 7%.
Furthermore, nearly 40% of all homes are owned outright, meaning they are mortgage-free. For homes that are financed, the average loan-to-value (LTV) ratio has significantly improved, dropping from around 70% in 2013 to 48% in Q1 2024. This indicates that homeowners now have more equity in their homes. Even if they encounter financial difficulties, they have various options available, such as selling their home, accessing a Home Equity Line of Credit, or refinancing under better terms, which helps prevent foreclosures.
The delinquency rate has also markedly improved, with only 0.6% of all mortgage balances being 90+ days delinquent in Q1 2024, compared to over 8% in 2008. Additionally, the number of new foreclosures has significantly decreased, with 44,180 consumers experiencing new foreclosures in Q1 2024, compared to 400,000 – 500,000 in 2008-09. These lower foreclosure rates further limit the number of homes entering the market, contributing to the overall shortage of available houses
The Bottom Line
The current housing market differs significantly from that of 2008. While national trends provide a broad overview, it’s essential to consider regional differences for a more precise understanding of the market. Economic factors such as job growth and wage levels vary across different areas. Median home prices also show significant regional disparities, which heavily influence housing demand amid affordability challenges. Sunbelt states are experiencing a rise in new single-family homes, boosting inventory and making these areas more favorable for buyers. In some regions, inventory levels and strong homeowner finances suggest potential price increases, while in others, they indicate a market correction rather than a crash.
