Understanding Today's Housing Market: Why a Crash is Unlikely and Prices are Set to Rise

If you're clinging to the hope that a housing market crash will lead to lower home prices, it's time to reconsider. According to the latest data, such a scenario is unlikely. Instead, experts predict that home prices will continue to rise.

The current housing market is vastly different from the one preceding the 2008 crash. Here are some key reasons why:

Stricter Loan Requirements Benefit the Market

Obtaining a home loan is more challenging now than it was before the 2008 crisis. Back then, lenient lending standards allowed almost anyone to secure a mortgage or refinance an existing one.

Nowadays, mortgage companies have raised the bar for homebuyers. The following graph, based on data from the Mortgage Bankers Association (MBA), illustrates this shift. A lower score indicates tougher mortgage approval criteria, while a higher score suggests easier approval:

The peak in the graph indicates that lending standards were much looser in the past. This led to higher risks for lenders and a surge in defaults and foreclosures.

Limited Housing Inventory Prevents Price Crashes

During the housing crisis, an excess of homes for sale, including short sales and foreclosures, caused prices to plummet. In contrast, today's market is characterized by a shortage of inventory.

The following graph, using data from the National Association of Realtors (NAR) and the Federal Reserve, compares the current months' supply of homes (in blue) with that during the crash (in red):

Insert graph showing lower inventory levels today

Currently, there is only a 3.0-month supply of unsold homes, compared to a 10.4-month supply in 2008. This scarcity means there is not enough inventory for home prices to crash as they did previously.

Homeowners Are Not Overextending Themselves

In the early 2000s, many homeowners borrowed against their home equity to fund luxury purchases. When home prices dropped and inventory rose, many found themselves in negative equity.

Today, homeowners are more cautious. Despite significant price increases in recent years, they are not tapping into their equity as they did before. Black Knight reports that tappable equity has reached an all-time high, indicating that homeowners have more equity than ever before and are in a stronger financial position. This reduces the likelihood of foreclosures and limits the influx of distressed properties onto the market, which in turn supports stable home prices.


In Conclusion:

While you might wish for a market shift that lowers home prices, the evidence suggests otherwise. The current market bears little resemblance to the conditions that led to the last crash.

 

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