Anyone who works in Real Estate these days can’t escape the line of questioning surrounding whether or not we are in a housing bubble or if there is going to be a market crash. People are seeing the prices of homes on the rise, and it begins to feel familiar. For anyone who was old enough to have experienced the Housing Market Crash of 2008, it does make you scratch your head and wonder if we are on a path that is going to lead to another big market crash.
Let’s dig in to why 2021 is NOT 2008 and we will not see history repeat itself. In today’s Real Estate Market, housing prices are up – which is the biggest similarity to 2008 – but thankfully, most similarities stop there.
Housing Prices are high right now due to simple supply and demand
The situation in the market right now is a classic example of supply and demand – one that a high school economics teacher would be thrilled to give – it’s that perfect. Interest rates are at an all time low – which is making potential buyers feel like they need to jump at locking in this low rate before it passes them by (demand) – coupled with the fact that home inventory is at an all time low (supply), then causing the price of houses to rise.
Why were housing prices skyrocketing before the 2008 Housing Market Crash? Mostly because there was a buying frenzy causing home prices to reach unsustainably high levels, due to predatory lending practices. Down payments were almost non-existent and people were approved for loans they should have never received. People were getting into homes with adjustable rate mortgages forcing them to default on their mortgages when rates increased to levels that were doubling and even tripling their monthly payments.
Then enter the Market Crash… it gets a little more complicated at this point, but to simplify – people defaulting on paying their mortgages, lead to foreclosures, which therefore decimated the financial securities that were backing the subprime mortgages. There is a lot more to that side of things, but the bottom line is this: in 2021, those poor lending practices are no longer allowed. The mortgage industry has been completely overhauled and regulated to ensure we do not see a repeat of 2008.
Rates are low right now to help fuel the economy through the coronavirus pandemic and according to Freddie Mac, these rates are projected to stay low throughout 2021 which will help with keeping the market lively and moving forward.
The other main difference in 2021 vs 2008 is the fact that many homeowners have more equity in their homes than the homeowners of 2008. This helps protect homeowners that may have fallen on hard times – they can refinance or pull cash out of their homes with their equity. Additionally, they could opt to sell their home rather than having to Short Sell or be forced into a foreclosure situation.
Will we see the market stabilize in the near future?
That depends on what happens with inventory of homes for sale. Currently, in the Central Valley and along the Central Coast, we have a one month supply of homes on the market. A common thought is having 4-6 months of supply is a balanced market, so it may be a while that we are in what is referred to as a Seller’s Market.
The hope is with the vaccine rollout and more things slowly returning to normalcy, current homeowners will have more confidence in listing their homes, therefore increasing inventory. In addition to those homes coming on the market, there is a fair amount of new builds that are also going to help add to the inventory, which will make things less competitive with buyers, which will slowly keep the housing prices in more balance.
While we unfortunately do not have a crystal ball, we can look to industry expert predictions and history to feel confident in saying that 2021 will not see a market crash. We know that everything in this market can feel a bit overwhelming, but we want to make sure that our potential buyers and sellers know that we are here to serve you and meet all of your real estate needs. If you are still feeling unsure and want to speak to one of us about the market, your options, or where to begin the buying or selling process, please reach out to us. We are happy to help and discuss things with you further.