After watching a historic climb in home sales prices coming out of the COVID-19 pandemic of 2020, many pundits have expressed concerns we’re headed for another recession similar to that inspired by the housing market crash of 2008. When coronavirus cases rose in early 2020, home sales dwindled to a trickle, and the housing market took an abrupt, if short-lived, nosedive.
But as COVID vaccines and federal stimulus money rolled out, home sales prices started rising sharply in response to pent-up pandemic demand. Many Americans started asking, “When is the housing market going to crash again?” But are we really in for another Great Recession? Probably not, and here’s why:
1) Lifestyle changes triggered today’s property purchases
When the coronavirus pandemic forced us to social distance and work remotely, many renters or homeowners chose to change their living arrangements—upgrading from shoebox apartments or purchasing larger homes for more family living space. These are different circumstances than the 2008 collapse when irresponsible financial institutions extended deceitful loans to ill-equipped, unsuitable borrowers, many of whom had no chance of being able to pay back variable interest rate loans once their payments ballooned.
2) Lending institutions are more selective
Unlike today’s pandemic-infused demand, the 2008 crisis centered around banks initiating mortgages and selling them to investors as mortgage-backed securities. This eliminated the lending institution’s risk by placing it all on investors, who could profit greatly if borrowers kept payments current. (However, many borrowers couldn’t.) By selling mortgages, banks were able to issue even more loans, adding to an already volatile lending climate. Toss in the proliferation of adjustable mortgage rate lending, and disaster was imminent.
Today, adjustable-rate mortgage lending is far less prevalent, and interest rates are much lower. Plus, current lending practices are more conservative, which has made mortgage-credit availability significantly lower post-pandemic than we saw in the years leading up to the 2008 housing crash.
3) Today’s home price rises are more organic
While current home sales have been spurred by the pandemic, in part, many are a result of timing and circumstance. Growing families are hunting for bigger homes in a post-pandemic market where would-be sellers are hesitant to part with their property due to health risks or the concern of finding a new home. Moreover, many builders have only recently resumed new construction after hitting pause in the wake of COVID lockdowns. That means there is limited new housing inventory to help meet buyer demand.
4) Most current homeowners have healthy equity
While there is concern about COVID-19 mortgage forbearance and potential foreclosures saturating the market, the risks are mostly confined to Federal Housing Administration (FHA)-backed loans where homeowners have little to no equity in their homes due to no to low down payment requirements on those loans. Most homeowners who have experienced pandemic-related financial difficulties have been building up healthy home equity through conventional mortgage loans. Given the high-demand for nationwide housing, they can likely sell their homes—for a profit in some cases—and return to renting if need be.
5) Interest rates are fairly stable
According to J.P. Morgan Research, typically a 100 basis-point decline in mortgage rates is associated with a 10 percent uptick in property sales. Though the forbearance issue represents a potential threat to the housing market, experts say home price growth is likely to slow when mortgage rates start climbing again. This should help normalize the current housing mania by pushing some potential buyers out of the market while allowing others an opening.
Most housing experts expect a slight rate rise this year, and current interest rates have already stabilized after early 2020 record lows.
If purchasing a home is in your future, contact an OVM Financial loan officer near you or apply online. Our in-house experts will help you determine if now is a safe time for you to buy and develop a sound payment plan for your future.