Are We Approaching the Next Housing Market Crash?

If you have been paying attention to the real estate market, you'll know that prices have been growing at astronomical rates. Driven by inflation, high savings amounts, and low interest, home prices across most of the country have experienced robust and consistent growth.

According to the S&P CoreLogic Case-Shriller National Home Price Index, which measures the average U.S. price in major metropolitan, home prices rose 18.8% in 2021, hitting a record high. As a result, motivated and cashed-up buyers submit offers on properties well and above asking prices, making it exceptionally hard for many to get into the market. In some regions, it's not unheard of for houses to sell for as much as 25% over the asking price.

With a red hot seller's market and record-high prices, many home buyers, owners, and unaware real estate professionals are wondering, are we headed for another major crash like 2008?

The answer is no, and there are many reasons why.

What happened that led up to the crash of 2008?

First, let's recap the market conditions and lending conditions that led to the crash in '08. Regulations in the U.S. were permitting some wild lending conditions. As a result, buyers could qualify on self-proclaimed income that didn't need to be carefully verified, and properties were qualifying based on drive-by valuations that didn't necessarily match their market value. Systematic problems and subprime lending criteria led to a market crash that can only be described as inevitable.

Subprime lending was widespread from the late 1990s through 2008.

Let's look at an example that could be one of hundreds of thousands of Americans.

John Doe goes to buy a house. He's self-employed, and last year he made about $80,000. This year John thinks he's on track to make the same. So, on his loan application, he puts down his income as $80,000. He's looking to get a loan with 100% financing because they are available, and why not? He believes that his cash is better invested elsewhere. So then, John buys his home for $300,000 that qualifies based on a drive-by appraisal and gets himself put into a fully financed, variable rate mortgage.

For a year, John diligently makes his payments before his income falters as the economy struggles, the real estate market starts taking a turn for the worse. Because of the market dip, he watches the value of his property plummet from $300,000 to $250,000. Then, his variable interest rate gets increased again and then again. Now he's struggling to make his monthly payments on a property he owes more to the bank than the property is worth, and it looks like the real estate market isn't going to improve anytime soon.

John, who didn’t have to invest a significant deposit and is now owing $50,000 more than the property is worth, starts to question if it's even worth holding onto the property. However, a short sale gives him a viable opt-out option from which he is confident he can financially recover. So, he gets in touch with his bank, and the property goes on the market.

Now, imagine John’s story or similar repeated millions of times. Homes are foreclosed on or short sold all over the country because buyers just don't have enough skin in the game, and interest rates have made their payments unmanageable. So when millions of homes go on the market nearly all at once, interest rates are high, and consumer confidence hits the floor, it's easy to see how prices could plummet at alarming rates.

Crazy sub-prime loans created the perfect storm for an insane crash. So, how is our market today any different? Despite initial assumptions, market and lending conditions are very different from those in the 2000s.