In recent months, you may have heard discussions about the economy and growing concerns about a potential recession. When these conversations start, it’s common for people to wonder whether a housing market crash is on the horizon. After all, the memory of the 2008 housing crisis still lingers in many minds. However, there’s good news: the housing market is not currently set up for a crash. Here’s why.
According to real estate journalist Michele Lerner:
“A housing market crash happens when home values plummet due to a lack of demand for homes or an oversupply.”
Let’s break down two critical reasons why this situation is not likely to occur anytime soon: the ongoing imbalance between supply and demand in the housing market and a low unemployment rate.
1. Demand for Homes Is Higher Than Supply
One of the key factors that led to the housing market crash in 2008 was an oversupply of homes. Essentially, there were more houses for sale than there were buyers. But today’s market is vastly different.
Supply and demand are foundational principles in real estate. In a balanced housing market, there’s typically around a six-month supply of homes available for sale. If the number of available homes exceeds six months, it indicates that supply is outpacing demand, which can put downward pressure on home prices. On the other hand, if supply is less than six months, demand exceeds supply, and prices are likely to remain stable or even increase.
The National Association of Realtors (NAR) provides data that illustrates the difference in housing supply between now and the time leading up to the 2008 crash. Before the 2008 housing crisis, there was a 13-month supply of homes. That means there were significantly more homes available than there were buyers. In contrast, today’s market shows only a 4.2-month supply of homes. This shortfall in available homes, compared to buyer demand, is one of the main reasons why the market is unlikely to crash.
In simpler terms, more people want to buy homes than there are homes available for sale right now. And when demand is greater than supply, prices tend to remain stable or increase, not crash.
It’s also important to remember that inventory levels can vary from market to market. While some local markets may be more balanced or even have a slight oversupply, most regions across the country continue to experience a housing shortage. As Lawrence Yun, Chief Economist at the National Association of Realtors, points out:
“We simply don’t have enough inventory. Will some markets see a price decline? Yes. [But] with the supply not being there, the repeat of a 30 percent price decline is highly, highly unlikely.”
So, while a price drop might happen in certain areas, the lack of housing supply makes a nationwide crash similar to 2008 very unlikely.
2. Unemployment Is Still Low
Another significant factor in preventing a housing market crash is the low unemployment rate. During the 2008 financial crisis, unemployment rates skyrocketed, leaving many homeowners unable to afford their mortgage payments, leading to a wave of foreclosures. This flood of distressed properties on the market further drove down home prices and contributed to the housing market collapse.
Today, however, the employment situation is much more stable. While there have been concerns about economic uncertainty, unemployment remains low. NAR’s data shows how different today’s labor market is from the one in 2008. During the financial crisis, the unemployment rate soared to 8.3%. Comparatively, the long-term average over the past 75 years is about 5.7%. But today’s unemployment rate is only 4.1%.
What does this mean for the housing market? When people are employed and earning steady incomes, they’re better able to afford their mortgage payments, significantly reducing the likelihood of foreclosures. The combination of a low unemployment rate and steady income levels means fewer homeowners are at risk of defaulting on their loans, which is one reason why we’re not likely to see the kind of foreclosure crisis that occurred in 2008.
In fact, with more people employed and financially stable, there’s a strong base of potential homebuyers. This added demand puts upward pressure on home prices, further stabilizing the market and mitigating the risk of a crash.
The Housing Market Today vs. 2008: Key Differences
While the talk of a potential recession might cause some anxiety, it’s essential to understand that the conditions driving today’s housing market are significantly different from those that led to the 2008 crisis. As Rick Sharga, Founder and CEO of CJ Patrick Company, puts it:
“Literally everything is different about today’s housing market dynamics than the conditions that led to the housing crisis.”
Let’s briefly look at some of the major differences:
Stricter Lending Standards: During the mid-2000s, lax lending standards allowed many people to take out mortgages they couldn’t afford. This created a wave of subprime loans, many of which defaulted when the economy took a downturn. Today, lending standards are much stricter, and only financially qualified borrowers are securing home loans, making widespread defaults far less likely.
More Equity: Homeowners today generally have more equity in their homes than they did in 2008. This equity serves as a buffer in case of a downturn, as people are less likely to face foreclosure when they have significant equity at stake.
Stronger Buyer Demand: The demand for housing today is strong, driven by demographics, low mortgage rates, and shifting preferences, including the desire for more space after the COVID-19 pandemic. This demand keeps prices buoyant, even in the face of economic headwinds.
Bottom Line: No Need to Panic
The fear of a housing market crash can be unsettling, especially when paired with concerns about a possible recession. But the current housing market is fundamentally healthier than it was in 2008, thanks to an ongoing shortage of homes and a strong labor market. Even though some regions may see slight price declines, there’s little evidence to suggest that we’re headed for a full-blown crash.
If you’re still worried or have questions about how these broader trends might affect your local market, it’s always a good idea to consult with a knowledgeable real estate agent. Real estate markets can vary widely by location, and getting insights specific to your area can help you make more informed decisions.
In the meantime, rest assured that the housing market today is not set up for a crash like it was in 2008. Instead, it remains stable, with strong demand and low unemployment helping to keep prices steady.