The Short Answer is No
The economic landscape of 2020 has been volatile and unpredictable due to the pandemic. Record numbers are being recorded for unemployment claims and we have a portion of the workforce working from home (some balancing kids online school with work). Conversely, interest rates are at all-time historic lows. These juxtaposing factors have some Americans wondering what pandemic-induced recession is going to mean for the real estate world. Are we headed toward another housing market crash that will mimic The Great Recession 2008? The short answer is no. A close analysis of what the market factors at work should leave homeowners feeling more assured.
Housing values have seen dramatic increases in the last year-plus, and in some locations housing values have increased as much as 20%. This is primarily due to a lack of inventory (sellers not wanting to sell, lack of new construction over the past decade) and a large number of buyers taking advantage of historically-low interest rates. This quick increase in housing value and buying frenzy is the main reason people are afraid of the previous recession repeating itself since some of the signs look familiar. The difference is that prior to the last recession, the sharp increase in housing values took place due to a buying frenzy caused by easy access to mortgages (more on this below). One could say that this was artificial demand since a percentage of those buyers should not have been able to qualify for a mortgage.
As compared to the period just before the recession, today’s homeowners have far more equity in their homes. Before the Great Recession, many new homeowners were getting homes with little down payment, meaning they had little or nothing to fall back on when prices declined. That is not the case today.
Mortgage interest rates in the early 2000’s leading up to the housing bubble averaged between 5-6% for a conventional 30-year loan. Currently, interest rates have dropped below 3% on a conventional 30-year loan for the first time ever. This difference in interest means hundreds of dollars each month in mortgage payment interest savings, especially important if homeowners need to refinance or adjust their loans.
Mortgage Lending Requirements
In addition to the difference in interest rates, there is also a chasm between the underwriting guidelines on mortgages during the housing bubble and the guidelines being enforced now. Much of what caused the housing collapse of 2008 was lenient lending guidelines and predatory lenders. In the early 2000’s loans were being granted to borrowers who were overextended and unfamiliar with their mortgage terms. Many took out adjustable rate mortgages that were a stretch to afford in the first place, and impossible to pay once the rate adjusted.
Since the housing market crash there were a series of regulatory guidelines put into place to protect the American population from predatory lending. Additionally, mortgage lenders have tightened their approval conditions, even more so since the pandemic began to mitigate the risk of mortgages going into default.
By and large, the housing market crash of 2008 was one of the key factors for the recession. The real estate market changes right now represent higher-than-normal demand for scarce inventory plus a reaction to the pandemic economy. While no one can assuredly say exactly what is in our future, real estate experts across the board do not see a looming bubble in our future.