How today’s housing market differs from previous booms and busts

  • The housing market is unlikely to collapse, but momentum could be slowing, analyst John Wake suggests.
  • In hot markets with the highest appreciation, property prices could fall between 10% and 20%.
  • While much has changed in lending since 2008, the behavior of investors and homebuyers is very similar.

When discussing the topic of a potential housing bubble, there’s a conventional wisdom to dismiss almost immediately the idea that today’s housing market could see anything like 2008, says real estate analyst and broker John Wake. Of course, the consequences of the subprime mortgage crash of 2008 – and after


– are still fresh in the memory of many people who have bought or sold a house in recent years.

But are we in another real estate bubble?

“Maybe,” says Wake, who examines and analyzes real estate data on his substack blog, Real Estate Decoded.

“People always say, ‘It’s not going to be like 2005,’ and yeah, that’s pretty much for sure,” he explains. “But we could get into a situation where prices drop 10% or 20%. That won’t happen this year, but it could happen the following year.”

Changes in the mortgage system

Real estate industry professionals and analysts often point to the tightening of lending standards since the 2008 crash as another reason why we won’t see a major housing market bust today, but it’s a little more complicated than that, Wake suggests.

“People say the credit isn’t that bad and we don’t all have liar credit, so we don’t have that many,” Wake says. “But unlike the savings and credit crunch or bubble before that in the ’70s, we still have a situation where you have someone making a mortgage, someone servicing the mortgage, and someone owning the mortgage , and it wasn’t like that before.”

The bubbles since the savings and credit crunch have not only changed the way a loan is originated and serviced, but also mean that borrowers are at enormous risk, Wake suggests.

“It’s still an advantage for service providers to cancel as soon as possible if someone defaults,” he explains. “The mechanics of the entire mortgage system tend to lead to rapid foreclosure on such accounts. So if we get into a downturn, that’s bad. But the structure of the savings and credit bubble was that they didn’t want foreclosure; They have delayed it for as long as possible, even renting houses for years and waiting for prices to rise again.

The combination of record-low interest rates, record-low inventories, a spate of stimulus money and the push toward the home office model has often been cited as the main cause of the housing boom the country has experienced since the pandemic began. However, the tide is shifting away from the sellers and moving more in the favor of the buyers as inventories rise and sales fall. High inflation and rising mortgage interest rates have also reduced the purchasing power of those looking for a home.

Fear of missing out and price dynamics

While the housing market may not be headed for a major crash, there’s a very good chance prices will fluctuate in the coming months. And the markets that have seen huge price increases in recent years could likely be the ones that will see the biggest price corrections over the next few years, Wake suggests.

“You could almost look at the subways that have risen the most and expect them to fall the most,” Wake says, highlighting areas like Austin, Phoenix and Las Vegas, among others. “Prices will not go down to baseline.”

This was certainly the case for Metro Phoenix in the run-up to the Great Recession.

“Phoenix is ​​definitely the poster child for what happened in that bubble. There weren’t many institutional investors back then — it was mom and pop investors,” Wake explains. “My theory is that it doesn’t matter where the money comes from, but if more money is put into real estate, prices will just go up because supply is so tight. But the problem wasn’t supply, it was just incredible demand because so many investors were making so much money that they just wanted to buy more homes.”

After the 2007-2008 housing crisis, prices in the Phoenix areas fell by more than 50%, primarily in response to overbuilding in an artificially inflated market.

But one of the key variables that will determine what might happen to house prices in the coming months, Wake says, is momentum. Will investors continue to have a big appetite for buying single-family homes and multi-family homes across the country, or are investors finally getting fed up?

“You get that momentum when prices go up for a period of time, then people expect them to go up in the future and then decide to buy,” Wake says. “But one thing that can happen is that prices typically level off in the summer. So if they level off long enough into the summer we can really lose that momentum that is part of the upward pressure. And if we don’t add another group of investors to push prices higher, that can really transform the market.”

But one theme that has been undeniably similar between the real estate boom of the early 2000s and that during the pandemic is fear of missing out, Wake adds.

“Getting back to the momentum point, once prices started going up and it was viewed as an investment, people might be like, ‘okay, it’s a crazy price, but it’s going up so fast,'” Wake explains. “And then if you’re a regular home buyer, it’s more scary. It’s not FOMO, it’s just a fear of thinking, ‘If I don’t buy now, I’ll never be able to buy a house for the rest of my life!’ And indeed, that was a common theme in 2004 and 2005.”

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