You may have heard chatter recently about the economy and a possible recession. Unsurprisingly, that noise worries some people about a housing market crash. Maybe you’re one of them. But here’s the good news – there’s no need to panic. The housing market is not set up for a crash right now.
Real estate journalist Michele Lerner says:
“A housing market crash happens when home values plummet due to a lack of demand for homes or an oversupply.”
With that definition in mind, here are two reasons why this isn’t on the horizon.
1. Demand for Homes Is Higher than Supply
One of the biggest reasons the housing market crashed in 2008 was an oversupply of homes. Today, though, it’s a very different story.
A general rule of thumb is that a market with balanced supply and demand has a six-month supply of homes. A higher number means supply outpaces demand, and a lower number means demand outpaces supply. The graph below uses data from NAR to put today’s situation into context:
The graph compares housing supply during three different periods. The red bar shows 13 months of supply before the 2008 crisis, which was far too much. For context, the gray bar shows a balanced market with six months of supply. And the blue bar indicates only 4.2 months of supply today.
But more people want to buy homes than homes available right now. So, demand is more significant than supply. Home prices stay steady or rise when that happens – the opposite of a housing market crash.
It’s important to note that inventory levels differ from market to market. Some areas may be more balanced, while a few could have a slight oversupply, impacting prices locally. However, most markets continue to experience a shortage of homes.
Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), says:
“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.”
2. Unemployment Is Still Low
When people are unemployed, they’re more likely to have trouble making their mortgage payments and may be forced to sell or face foreclosure. That was a big problem during the 2008 financial crisis. Today, the employment situation is much more stable (see graph below):
Again, this graph shows three different periods, but this one is the unemployment rate. The red bar represents the 2008 financial crisis when unemployment was 8.3%. The gray bar shows the 75-year average of 5.7%. The blue bar shows the unemployment rate today, which is much lower at just 4.1%.
People are working, earning an income, and making mortgage payments. That’s one reason why the wave of foreclosures in 2008 isn’t going to happen again this time. Plus, since so many people are employed right now, many can buy a home, and this demand keeps upward pressure on prices.
Today’s Housing Market Is Stronger than in 2008
While it’s understandable to be concerned about a recession and economic uncertainty, know this: the housing market is much better than in 2008. According to Rick Sharga, Founder and CEO at CJ Patrick Company:
“Literally everything is different about today’s housing market dynamics than the conditions that led to the housing crisis.”
Demand for homes still outpaces supply, and unemployment remains low. These two key factors will help prevent the housing market from crashing anytime soon.
Bottom Line
The housing market is doing much better than in 2008, but it’s important to remember that real estate is very local.
So, staying informed about our specific market is always a good idea. Feel free to reach out if you have any questions or want to discuss how these factors play out in our area.
