Five Reasons why the 2022 Market is not like the 2008 Market Crash

June 30, 2022 | Market Pulse | By: Allison

There is some speculation about whether or not we’ve been in a real estate bubble, and if so, if it will burst like in the 2008 housing crash. While it’s easy to get caught up in headlines and cocktail party conversations over these issues, it’s important to look at the reality of the market and what’s actually happening nationally as well as locally. Here are the top five reasons why it’s unlikely we are heading towards a market crash, especially here in the DMV. 

Here are the top five reasons why it is very unlikely we are heading towards a market crash, especially here in the DMV. 

1. Inventory (or the number of homes available for sale) is much lower. The real estate market has had historically low inventory in the DMV for many years, especially following the Amazon HQ2 announcement. The reality in our market is that inventory is going to be a challenge for many years, given the high demand for housing in and around DC, especially among Millennial buyers, and there is a shortage of space available to build. Nationally, inventory also remains low, in contrast to 2008, when builders were building like crazy and there was an oversupply in the market. Now, building costs have skyrocketed and supply chain issues have caused an inventory shortage across the board.

2. Today’s homeowners have record amounts of home equity. In 2011, 25% of borrowers were underwater on their mortgages. In comparison, just 2.5% of borrowers have less than 10% equity in their homes. Mortgage debt in the US is now less than 43% of current home values, the lowest ever on record. High equity means a lesser likelihood of short sales which were prevalent in 2008. This can partially be attributed to home prices rising over the last few years, putting homeowners in a positive equity position when it comes time to sell.

3. After the 2008 crash, the US Government implemented much tighter regulations on the lending industry. These tighter restrictions led to a tightening up across the board of which types of loans are available and who qualifies for them. This means that fewer risky loans are currently in place, reducing the risk of foreclosures that were prevalent after the crash in 2008.

4. Fewer buyers are facing rate resets. For example, there are currently 2.5 million adjustable-rate mortgages (ARMs – meaning that your rate increases or decreases after a certain amount of time according to market rate interest rates) outstanding today, which is about 8% of active mortgages, the lowest volume on record. In 2008, just before the housing market crash, there were 13.1 million ARMs, representing 36% of all mortgages. More than 80% of today’s ARM originations operate under a fixed rate for the first 7-10 years, compared to 2007, when many ARMs were for short periods of time like three or five years. This means that fewer buyers are facing resets and even fewer will face resets while they are still occupying that home. While 1.4 million ARMs are currently facing higher rate resets, those borrowers will have to make higher monthly payments. In 2007, about 10 million ARMs were facing higher resets.

5. Mortgage delinquencies are at a record low & the average borrower’s FICO score is at a record high. Of the 53.5 million first-lien home mortgages in the country today, the average borrower’s FICO credit score is 751 versus when 699 in 2010, two years after the financial sector’s meltdown. Mortgage delinquencies are now also at a record low, with just under 3% of mortgages past due. 

In addition to the above factors, rates, while rising, are starting to stabilize. As of this writing, they are down from over 6% a week ago and are hovering around 5.5% for a fixed-rate loan. While many people are worried about rising rates, many have forgotten that mortgage rates began to rise after 2016 and reached their peak at the end of 2018 and the start of 2019 as employment and the overall economy was strong and growing. Rates on a 30-year fixed-rate mortgage (FRM) ran between 3.95% on the low end and 5.34% on the high end, not that much lower than today’s rates. The market remained stable during that fluctuation.

More good news for those of us in the DMV is that even though the housing market adjusted in the DC area in 2008, we didn’t face the same impact that most of the country did. We have one of the most stable markets in the country due to the Federal Government and a constant influx of new people moving in and out of the area. Now, with Boeing and Raytheon announcing the relocation of their headquarters to Northern Virginia, joining Amazon’s HQ2, we are in an even better position than we were in 2008, with big business leaders believing in the strength of the DC area economy. You can read more about why we are so bullish on our local housing market here. New housing inventory will continue to be a challenge, and while that is frustrating for buyers, it is excellent news for maintaining the prices we’ve seen in our area.  

While I don’t anticipate home prices to continue to escalate as wildly as they have over the last two years, the market indicators (and what we have seen so far on the ground) are not pointing to any kind of market decline in our area.  

As always, if you have real estate questions, we are happy to chat! 

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