Money magazine reported on April 30, 2020, "Four out of five agents surveyed in early April by the National Association of Realtors said they saw fewer houses on the market. Only half of Americans said they think that now is a good time to buy a home, according to a recent Gallup survey — the lowest share since Gallup began tracking people's sentiments on real estate in 1978."
With hindsight, we know the exact opposite happened: We saw record home sales and homes flying off the shelves at an unprecedented speed.
It shouldn't be surprising for anyone who has been in real estate for more than a decade that we're hearing the same doom and gloom forecasts today.
This time, the catalyst is not a virus, but an unprecedented rise in mortgage rates. Current headlines forecast more bad news for housing: CBS News reports, "U.S. home prices could fall as much as 20% next year," with the New York Times adding, "The Housing Market Is Worse Than You Think."
One of the most recent negative headlines buries the news for doom and gloom, leading with: "More than $1 trillion in equity shed during third quarter." The same story notes that "tappable equity at the end of September was at $10.5 trillion," and that "home prices remain up 45% from the start of the COVID-19 crisis. Median home prices are still at least 19% above their February 2020 levels in every major market in the country."
It is the headlines that are causing an overreaction among many real estate agents, resulting frequently in panic.
The good news is that 2023 is not 2008. The numbers prove the difference.
So, let's stop talking about single-source predictions and economic forecasts and instead focus on what the data tells us about today's real estate market compared to 2008.
1. Massive versus little equity: In 2008, "homes were underwater." That was the dominant buzz phrase to describe the chaos that followed when the financial markets collapsed.
But the rapid rise in home values during the pandemic has created a completely different real estate market in 2023.
Homeowner equity keeps growing, even today despite recent market turndown, reports real estate data guru ATTOM. Only one in 35 homes are seriously underwater. In 2008, nearly one in five homeowners were underwater, CNN Money said on October 31, 2008.
2. Highest FICO scores ever: Between 2004 and 2013, which included the mortgage crisis, average credit scores were at their lowest recorded level at 686.
From 2018 to 2020, the average rose to 710, a record high according to a report from credit firm Experian. Others find the average score is even higher, hitting a record high of 788 in the first quarter of 2022, the Federal Reserve Bank of New York reported.
Between 2001 and 2009, nearly a third of all home loans were made with a FICO score below 660. Today, few new mortgage loans are made for borrowers with credit scores below 670.
What drove the last housing crisis to the brink was the wide availability of no-doc and subprime mortgage loans (below 600 FICO scores). We know that lower FICO scores resulted in more loans that were seriously delinquent in 2005 through 2007.
Subprime loans today are but a small fraction of mortgages originated: just 3 percent, according to the N.Y. Fed, versus about 1 in 8 loans from 2003 to 2007.
3. Lower foreclosure rates: In January 2009, the MarketWatch headline said, "2009 foreclosures hit a record high: No relief in sight as delinquent loans continue to pile up." That month, foreclosure filings jumped 21%, comprising 2.21% of all U.S. housing units. A stunning 2.82 million housing units, or one in 45, were in foreclosure.
In September, 31,836 properties had foreclosure filings, according to ATTOM, saying they are still lagging at pre-pandemic levels.
4. Inventory shortage of homes needed for population growth: Between 2007 and 2020, homebuilders started at nearly 400,000 homes fewer than their historical average. As the No. 1 ranked real estate agent Ben Caballero expertly detailed for Inman News in May 2020, even if homebuilders can increase production to 1.5 million new homes a year, it will take at least six years to catch up.
We have a major housing shortage. Supply and demand drive U.S. markets, including real estate. Keep in mind that the U.S. population in 1980 was 226.5 million people. Today, we have 100 million more people: the population is 331.9 million.
While we will see many markets have more home inventory coming online, we have a systemic national shortage and will continue to need more homes.
5. 4 million to 5 million homes are sold each year, regardless of interest rates: From 1998 until 2022, over 4 million homes have been sold annually. When interest rates were below 3%, more than 6 million existing homes were sold. But when interest rates were close to 6% in 2005, 7.1 million existing home sales were made.
Interest rates are not the only driver in a home-selling decision. If they were, home sales would completely collapse when interest rates are higher. But they don't — because life happens.
People marry, have children, kids move out, divorces happen, families relocate to retire, careerists move for a new job, family members die, Americans want a bigger or smaller home, to move closer to family — those are just some of the reasons driving home selling decisions.
Also, remember the adage that you "marry the home but date the rate." This is as true today as in October of 1981, when mortgage rates exceeded 18%. Rates go up, and they also come down. People refinance. How many people do you know have had the same home mortgage for 30 years?
No one can predict interest rates — but historically, we know they do not remain high forever.
2023 is not 2008
As you can see, the sky is not falling. But will the housing market experience a correction? Yes. Prices cannot go up forever without wages keeping pace: History shows us that.
But will we have a collapse in pricing? The data says, "no." 2023 is a year with homeowners having more home equity because of the run-up in home values. FICO scores will remain high, and the activity in subprime loans and foreclosures remain far below anything like we saw in 2008.
While we will likely see more inventory in many markets, it won't be enough to fix our housing shortage problem. Life happens regardless of the news. People will still move whatever interest rates are doing. Of course, some may pause — just like people paused when the pandemic first struck — but history shows buyers adjust and come back into the market.