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Are We Heading Toward Another Mortgage Crisis and Market Crash?

07/06/22 10:54 AM – Caleb Hanson

Everyone is wondering these days: Are we heading toward another mortgage crisis and market crash like the one in 2008? The answer is not simple, but here’s my take on the situation:

To effectively compare our current situation to 2008, we need to define the main elements of the 2008 mortgage crisis, so I’ll do my best to summarize a complex series of events.

In the years preceding the 2008 mortgage crisis, lenders loosened lending requirements so much so that people who really could not afford to repay what they were borrowing were allowed to borrow money anyway. Many lenders also allowed borrowers to finance 100% of the purchase price, which meant that those new homeowners didn’t have any equity at the start. The looser guidelines created a surge in the number of prospective buyers for homes, which drove prices higher and higher.

As long as the cycle of increasing prices continued, homeowners could sell and make some money or at least break even. However, eventually, a critical mass of people who financed homes they couldn’t afford were forced to sell to avoid foreclosure. With the increase in supply, prices stopped skyrocketing and began decreasing. This left many homeowners owing more on their mortgages than they could net if they sold their homes. Many of those homeowners could no longer afford their mortgages, and they couldn’t sell either because home prices had fallen so drastically. The number of homes on the market continued to grow as people attempted to sell and couldn’t, which further drove down home values. The number of foreclosures grew until it hit a tipping point that sent financial markets and the real estate market into a dive that wouldn’t bottom out for several years.

How does our current situation compare?

Prices have risen substantially in the last few years, which also happened right before the last crash,  and it’s understandable for so many people to feel concerned right now.

While the conditions seem very similar on the surface, the underlying reasons these conditions exist are different now than they were before the last crash.

First, prices have risen during the last decade because people can actually afford to pay higher prices. In addition, lenders have maintained much more responsible lending practices since 2008. According to a Corelogic report released in April 2022, mortgage delinquency is the lowest it’s ever been. Also, there are very few homeowners now who owe more than what their homes are worth. If those homeowners who are currently behind on their payments cannot earn enough to keep their houses, they could likely still sell, net some money, and use the proceeds to help them stay financially afloat. Thus, at least for now, I don’t think very many people who are getting notices of default (pre-foreclosure) due to late payments are likely to lose their homes to foreclosure.

Even if many homeowners reached the point of being forced to sell around the same time, I don’t think the impact would be nearly as dramatic as what happened in 2008. The U.S. housing market as a whole and the Southern California market in particular are both experiencing a shortage of available homes compared to demand right now. According to data from the California Regional Multiple Listing Service (CRMLS), the number of homes available compared to the number of buyers is the lowest it has been since they started tracking it online in 2008. It will take a large influx of sellers AND a decrease in demand to shift from many buyers competing for limited homes to many sellers competing for limited buyers.

Even after a couple months of significantly higher interest rates, market trends don’t suggest a sharp decline in prices anytime soon. For my latest review of market conditions, check out our Southern California Market Trends page.

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