Reasons Why a Housing Market Collapse Is Unlikely

If you’re holding out hope that the housing market is going to crash and bring home prices back down, here’s a look at what the data shows. And spoiler alert: that’s not in the cards. Instead, experts say home prices are going to keep going up.

The current market differs significantly from pre-2008 housing crash conditions. Here's the explanation.

Securing a Loan Has Become More Difficult – And That's Beneficial

Securing a home loan was simpler before the 2008 housing crisis compared to the present day. At that time, banks implemented more lenient lending criteria, enabling almost anyone to qualify for a home loan or refinance.

Presently, homebuyers encounter stricter requirements from mortgage firms. The graph below, utilizing data from the Mortgage Bankers Association (MBA), illustrates this shift. Lower values indicate greater difficulty in obtaining a mortgage, while higher values signify easier access.

The graph's peak indicates that in the past, lending criteria were less stringent compared to the present. This implies that financial institutions assumed significantly higher risks in terms of individuals and mortgage products during the crisis period. Consequently, this situation resulted in widespread defaults and a surge of foreclosed properties entering the market.

Reduced Inventory of Homes for Sale Suggests Stable Prices

During the housing crisis, an excess of homes on the market, including many short sales and foreclosures, led to a significant drop in home prices. However, the current situation is characterized by a shortage of inventory, not an abundance.

The following graph utilizes information from the National Association of Realtors (NAR) and the Federal Reserve to illustrate the comparison between the current months' supply of available homes (depicted in blue) and the period during the crash (depicted in red).

Currently, the unsold inventory stands at a 3.0-month supply, a significant decrease from the peak of 10.4 months in 2008. This scarcity in inventory indicates that there is insufficient supply in the market to cause a drastic decline in home prices as seen during the previous housing crisis.

Reduced Home Equity Withdrawals Compared to Early 2000s

During the period leading up to the housing crash, numerous homeowners tapped into their home equity to fund purchases like new cars, boats, and vacations. Consequently, as home prices began to decline due to an oversupply in the market, many of these homeowners ended up owing more on their mortgages than their homes were worth.

However, homeowners today are exercising greater caution. Despite the significant surge in home prices over recent years, they are not accessing their equity to the extent they did previously.

Black Knight has indicated that the available tappable equity (the amount of equity homeowners can draw upon while maintaining a maximum 80% loan-to-value ratio, or LTV) has reached unprecedented levels.

This signifies that, collectively, homeowners possess more available equity than at any previous point, which is excellent news. Today, homeowners are in a far more robust position than they were in the early 2000s. The same report from Black Knight further elaborates on this.

"By the end of the year, only 1.1% of mortgage holders (582,000) were underwater, a decrease from 1.5% (807,000) the previous year."

With homeowners in a stronger financial position currently, they will have alternatives to prevent foreclosure, thereby reducing the influx of distressed properties into the market. This scarcity in inventory will prevent a significant decline in prices.

Bottom Line

Despite the desire for a price decrease, the data indicates a different outcome. Recent research unequivocally demonstrates that the current market differs significantly from past conditions.