With declining home sales, home buyers and sellers alike are wondering whether we are about to see a decline in home prices like what we saw during the financial crisis of 2009-2013. While both market cycles saw strong buyer demand which drove a rapid increase in home prices over a relatively short period of time, that is where the similarities stop. A more complete comparison of the housing market, then and now, helps to explain the underlying strength of today’s market and why we are not likely to see what we saw nearly a decade ago.
1. The underlying demand for homeownership remains strong.
Today, the underlying demand for homeownership is both real and sustainable, unlike the period leading up to the financial crisis. Over 15 years ago, lower lending standards made it easy for just about anyone to qualify for a home loan, artificially boosting demand. Once things began to turn, we saw mass defaults, foreclosures, and falling home prices. Today, housing demand is based on strong, even persistent, growth in the overall economy with highly qualified buyers.
That said, the dramatic and unsustainable rise in home prices, up over 25% in a two-year period, combined with the Federal Reserves efforts to combat inflation, which has driven up mortgage rates, has challenged affordability and dampened home sales. This slowdown represents a return to a more normal pace and a welcomed break, at least for buyers, from the frenzied pace of last spring, often seeing multiple offers and contract prices that ended up well above asking.
2. Inventory remains low and demand continues to outpace supply.
While buyer demand has softened, based on the combination of factors outlined above, it still out paces the growth in the supply of homes for sale. After hitting an all time low of roughly 1,000 homes for sale early last spring, inventory grew to 3,200 by mid- November. Since that time, inventory has dropped by nearly 25% to under 2,500 homes for sale market wide. To put that in perspective, based on the current level of buyer demand, active inventory would need to triple for us to reach a “balanced” market.
Additionally, while active inventory typical grows during the spring selling season, new listings taken are down on a year over year basis as some sellers, who may not be able to find a home to move to and may also be challenged by affordability issues, appear to be more hesitant to list their home for sale.
Contrast today’s market with the market prior to the Great Recession. While housing demand was strong, we also had a record high number of homes for sale. When demand dropped off due to a severe economic downturn, it was that supply imbalance which led to the housing crash. Those conditions simply don’t exist in today’s market.
3. We are not facing a wave of pending foreclosures.
Back in 2009, on top of already high inventory levels, the Financial Crisis, followed by the Great Recession, saw foreclosures flood the market as unqualified homeowners with little to no equity lost their homes. The result was a downward spiral in home prices that was only corrected when the economy began to recover and demand increased, absorbing all the excess supply.
Today, after much stricter lending standards over the past decade, foreclosures and short sales represent an all-time low 0.5% of all available local listings. In short, the foreclosure market is basically nonexistent with no signs of home foreclosures dumping massive amounts of inventory on the market and depressing prices.
At the end of the day, the slow down in buyer demand we are currently experiencing is a healthy adjustment to the housing market. Over time, as wages increase, home prices stabilize, and mortgage rates come down, which we have already seen, at least compared to where rates were 90 days ago, buyer activity is expected to resume at healthy and sustainable levels.