While the real estate market is certainly cooling off in many parts of the country, most experts agree that we are not headed for a repeat of the 2008 crash. Instead, the ongoing economic slowdown and rising interest rates are likely to result in a market correction, with home prices declining to more normal levels, time on the market increasing, and home prices appreciating less rapidly. For investors, the ongoing market conditions warrant continued vigilance in assessing risks, but should not trigger panic at this time.
Current Real Estate Market Conditions vs. the 2008 Housing Crisis
The collapse of the housing market was at the center of our last recession in 2008. So, it makes sense that investors are concerned about how the current economic uncertainty will impact the market, which until recently saw rapidly rising property values and low interest rates.
When evaluating the likelihood of another burst housing bubble, it is important to understand the differences between the 2008 recession and today. As outlined in a recent report by Procida Funding, the 2008 housing crisis resulted from unique conditions, including loose lending practices, the proliferation of adjustable-rate mortgages, and widespread real estate speculation. Mortgage defaults and declining home prices resulted in the collapse of the subprime mortgage market and a glut of available properties.
Today, the housing market is not oversupplied, with willing buyers still outnumbering sellers. Going forward, rising interest rates may further discourage property owners from selling. The housing market has also historically remained stable, even during recessions. Of the seven recessions during the last 50 years, the recessions of 1990-91 and in 2007-2009 are outliers in that they saw declining home prices. Notably, both periods also saw risky lending practices.
Another key difference is that mortgage borrowers' creditworthiness is much stronger today, with tightened lending standards directly resulting from the 2008 recession. According to Procida, while borrowers with credit scores below 660 accounted for more than 25% of mortgage originations in late 2006 and early 2007, they have accounted for just 8% of mortgage originations since 2009. Foreclosure risk is also significantly lower today; the percentage of new mortgages with equity below 3% of the home's purchase price exceeded 31% in late 2006, but decreased significantly to 8.7% as of September 2021, representing the lowest level in the two decades since data collections started. Additionally, despite media speculation of an impending housing recession, mortgage rates and housing affordability still remain near historical norms, even after accounting for rising interest rates and inflated home prices.
Instead of mirroring the 2008 crash, Procida and others speculate that current conditions are more akin to those of the 1970s and early 1980s, which also saw skyrocketing gas prices, a slumping economy, and interest rate hikes by the Federal Reserve. "Between 1972 and 1982, during which time inflation averaged 8.2% per year and the 30-year mortgage rate averaged 10.8%, home prices and commercial real estate appreciated at average annual rates of 9.8% and 9.4%, respectively. By comparison, the stock market achieved an average nominal return of only 2.5% per year, which equated to a negative real return," Procida's report states. "To the extent that inflation and higher interest rates cause turbulence in the stock market, these factors may even bolster the housing market as investors appreciate its intrinsic value and relative lack of volatility."
Key Takeaway for Real Estate Investors
Compared to other investments, real estate generally remains lower risk during times of economic uncertainty. While changing market conditions will likely require a shift in real estate investment strategies, there is no need to panic. Instead, it's time to reevaluate your portfolio and determine whether any changes are needed to ride out a potential downturn.
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