Last year, there were many pessimistic forecasts about the U.S. housing market. After home prices had soared nearly 50% nationally during the pandemic, a growing number of economic commentators began calling home values a bubble and predicting an impending housing crash like the one that began in 2008.
When nationwide home prices peaked and began falling in June 2022, it appeared that these predictions might be correct. However, by early 2023, the market had resumed its rise. Now, home values have hit a new record high, and talk about a housing bubble seems to have mostly faded away.
So, what happened? In short, while the U.S. economy is facing challenges such as higher inflation and interest rates, several resilient points of economic strength have aligned to keep home values strong. Here are the top reasons why 2023 hasn’t been a repeat of 2008 for the housing market.
Shortage of housing inventory
In the previous housing crisis, there were too many homes for sale and not enough buyers, which caused home values to fall. Today, however, the housing market has the opposite problem: there aren’t enough home sellers. Higher interest rates have made homeowners reluctant to sell their homes and give up their current mortgages, and homebuilders have yet to catch up on the demand for more housing. Until this imbalance is corrected, it will continue to support higher home values.
Strong lending standards
Risky mortgage lending was a key contributor to the 2008 housing downturn. This was exemplified by the growth of subprime mortgages – home loans made to borrowers with below-average credit. In 2002, subprime loans made up 7.4% of all mortgages, but by 2006, the number had spiked to 23.5%. Since then, lending practices and regulations have been strengthened, and the average mortgage borrower now has stellar credit, meaning the risk of a mortgage-driven housing bust remains low.
Resilient economy and employment
Last year, many economists were predicting an imminent recession. If the economy were to falter and unemployment were to rise, homeowners might be forced into home sales or foreclosures, setting off a new housing downturn. However, that prediction has not come to be. Unemployment remains near historic lows, which continues to support household finances and the housing market.
Demographic trends toward new buyers
In 2004, the homeownership rate in the U.S. hit a record high of 69%. That number tumbled to 63% over the years that followed, but it has been on the rebound since 2016 and currently stands at 66%. This upward trend, powered in significant part by a growing number of Millennial and Hispanic homeowners, is another factor that is supporting current home values.
Low foreclosure rate
During the 2008 housing crisis, America was swept by a wave of foreclosures, flooding the market with homes and driving down prices. Many homeowners had been unable to keep up with their mortgage payments, while many others owed more on their homes than they were worth and walked away. By contrast, foreclosures hit a record low in 2020, and average home equity hit a record high in 2022. This shows that there is not a new foreclosure crisis in sight.
While there are no crystal balls to see into the future, for the reasons above, it seems safe to say that U.S. home values will remain strong for years to come. While potential first-time homebuyers may have been hoping for a generous dip in home prices, there are other ways to make homeownership more affordable. Get in touch anytime for a free mortgage consultation to learn about your options.