Is a Housing Crash on the Way?

As you watch housing prices rise at what may feel like an irrationally fast rate, you may be tempted to assume there is another bubble on the horizon. But is that the case? Let’s compare the 2008 housing crisis with today.

 

In 2008, the world faced an economic downturn that devastated world financial markets along with banking and real estate industries. The Great Recession started in the United States because of a subprime mortgage crisis. A subprime mortgage is a home loan granted to borrowers with poor credit histories, and these loans are very high-risk.

 

From 2004-2008, homebuilders optimistically built at an unprecedented rate, contributing to what eventually became an oversupply of homes on the market. Soon enough, the financial strains reduced the demand, leaving thousands of homes unfinished and unpurchased. Combined with the bankruptcies of major mortgage companies, this caused housing prices to plummet, and people ended up “underwater” with their loans, owing much more than the value of their homes.

 

As these events unfolded, the stock market took a plunge to less than half of its value, causing hundreds of thousands of Americans to suffer catastrophic losses in their life savings investments.

 

At the apex of the housing crisis, one in ten homes sat vacant in Phoenix. Some home values dropped as much as 50 percent.

 

If you lived in Arizona in the years leading up to 2008, you may remember the massive building boom across Maricopa County. Everywhere you looked, homes and businesses were under construction. All of that came to a screeching halt when the housing bubble burst.

 

Construction did not recover for another decade and has slowly increased again over the past few years, but this time is different. Instead of building more than the buyers are demanding, skyrocketing land prices and construction costs leave us facing an unprecedented lack of inventory to meet rising demand.

 

What is driving this demand? One element is Maricopa County’s spot among top metros for job growth. Ranked #1 for attracting and retaining jobs by labor-analytics firm Emsi, Maricopa County is also #7 for having a good environment for startups according to the U.S. Census Bureau. The variety of industries has created a feedback loop where existing talent attracts firms and investment, which in turn attracts more talent.

 

Another driver for housing demand is the Millennials. As the time arrived for this behemoth demographic group to start families, they began purchasing homes in large numbers in 2019 and continue to do so.

 

Top it all off with the lowest interest rates ever and you have the perfect recipe for a housing boom. Except that new housing is not coming on the market fast enough to meet the supply.

 

In 2008, credit opportunities were too easy for people to buy homes they could not afford. Ninety percent of refinancing deals were borrowers pulling cash out of their homes to buy other luxuries. Foreclosures and short sale listings became excessively high.

 

The story on all counts could not be more different today. Today’s buyers are generally well-qualified. They have high credit scores and tend to make sound financial decisions. Currently, only 33% of refinances result in pulling cash from the equity in their homes, while the money often goes to reduce debt. This trend greatly reduces the risk of homeowners losing their homes in the future. Distressed sales are at the lowest levels ever recorded according to Michael Orr of the Cromford Report.

 

It also seems that Arizona has become the darling of the West. Reasonable taxes and cost of living, an efficient freeway and transportation system, plus amazing outdoor recreation look pretty good compared to many previous West Coast hot spots.

 

The state of the housing market today is dramatically different than what we saw leading up to 2008. Even if inventory were to triple suddenly, there would still be more demand for homes than there is a supply. Development land in the Northeast Valley is scarce, construction costs continue to rise, and all of this will only make existing housing more valuable. Surely there will be some price resistance, but the demand will certainly favor those who buy sooner than later.

 

For the foreseeable future, our housing market will make things great for sellers and tough for buyers, with buyers struggling to get their offers accepted. But RE/MAX Sun Properties associates have assisted more buyers and sellers to create successful real estate stories this year than ever before. They can help you understand if now is the best time to act.