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How is the 2023 Housing Market Different From 2008?

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Woman on laptop and phone tracking the housing market's performance and wondering how the 2023 housing market is different from 2008.

How is the 2023 Housing Market Different From 2008?

When the pandemic started in 2020, the Federal Reserve anticipated a major downswing in consumer confidence. This led to a great decline in borrowing activity. To stimulate the economy, they lowered interest rates to record lows, causing the average 30-year mortgage to clock in at 2.97% in June 2020. This, combined with a surge of remote workers who were suddenly able to new consider new geographical areas where they could afford to buy a home, led to a sharp increase in demand for property.

Between December 2019 and June 2022, housing prices were up by an astonishing 45% across the nation — simply too high to keep pace with economic activity as the world has gradually returned to normal. So to prevent catastrophe, the Federal Reserve began hiking interest rates, causing the average 30-year mortgage rate to come all the way up to 7.32% as of December. While this was a calculated decision to help reverse too-high home prices, it has worried many people. This even caused some to believe we were on our way to another 2008 recession-style crash.

What’s Happening In The Housing Market?

As interest rates have risen to a 12-year high, home prices have fallen, which is precisely what the Federal Reserve aimed to achieve as they hiked interest rates throughout the year. While it hits hard for the people who wanted to purchase a home this year, it was the only way to stifle the extremely optimistic buying behavior we’ve seen over the past few years.

While optimism is good for the economy, the relentless demand caused housing prices to soar across the nation, reaching all-time highs that have worsened the affordability crisis we’ve been fighting for over a decade. In the short term, it can be hard to see how increased mortgage rates will help affordability, but the results will begin to unfold in the coming year. Experts predict that home prices may correct by as much as 20% to 30% across the nation, bringing what’s currently a $600k home down to about $450k.

With that said, for non-cash buyers, it doesn’t truly matter how far home prices fall as long as mortgage rates remain elevated to such a high degree, as this impacts affordability from the other end of the equation. For example, the 30-year mortgage payment on a $450k home at January’s low rate of 3.22% would be $1,951 compared to $3,091 at today’s rate of 7.32%. This means someone trying to take out a mortgage today has far less borrowing power than they did at the start of the year, potentially offsetting any price corrections that have happened so far, but that’s not the whole picture.

Once housing prices begin correcting somewhere around mid-to-late 2023, experts expect mortgage interest rates to begin falling, allowing buyers to enter the market comfortably once again.

Sometime by 2024, it’s predicted that interest rates will be down around 5%, and home prices should be far less than the pandemic highs. So, where does that leave us with the housing market in the meantime?  

Will the Housing Market Crash? 

The short answer as to will the housing market crash is a resounding “No!” A crash like the one that happened during the 2008 recession is unlikely, if not impossible, given the protections that have been put in place since that event. It’s also important to remember why the 2008 housing crash occurred, which was not driven by increased affordability but rather due to predatory lending that targeted individuals who were not in a strong enough financial position to buy or maintain a home.

Meanwhile, the pandemic led to increased affordability with a surge of newly-remote workers being able to branch out into suburban and rural areas where property costs less. In fact, this factor alone has been attributed as the cause of more than 60% of the increase in home prices. This is very much unlike what happened in the years leading up to 2008 when people were being given mortgages they truly couldn’t afford, a practice that is now heavily regulated with multiple safeguards in place to ensure only appropriately sized mortgages are being signed.

With that in mind, many people are worried that those who bought in at pandemic highs are now in trouble due to plummeting home values. It’s true that a number of individuals could end up upside down on their home — meaning they owe more than it’s worth — but that doesn’t automatically mean they won’t be able to afford to make their mortgage payments. 

What’s Different From The 2008 Recession? 

Many factors make today’s housing market starkly different from the pre-2008 recession environment, including better regulatory control. The primary differences to note include the Dodd-Frank Wall Street Reform and Consumer Protection Act. This was established to regulate lending activities. It led to major reforms, helping to ensure consumers weren’t given unaffordable mortgages.

As a result of the Dodd-Frank act, the Consumer Financial Protection Bureau (CFPB) was established, which is a federal agency that monitors the activity of lenders and other financial institutions and acts to protect consumers. Other regulatory bodies also exist, and the Dodd-Frank Act amended some existing laws as well. For instance, protections for whistleblowers who expose predatory lenders and other dishonest practices were increased, and so was the monetary reward for being a whistleblower in order to encourage action.

In addition to these laws, more than anything, it’s important to see that the situation overall is very different from 2008. The borrowers who took out mortgages over the last few years were in a strong financial position overall, with higher-than-average credit scores and savings. This is in stark contrast to the populations that were targeted with mortgages before the 2008 recession.

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