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Will Housing Market Downturn Be as Devastating as 2008 Crash?

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Warnings about the potential collapse of the housing market are widespread, as the United States claims: Soaring house pricesMortgage rates are high and very high inflation.. But housing industry experts don’t expect the recession to be as bad as the 2008 crash, calling it a completely different animal.

The warning prompted a comparison with 2008, when the market collapsed, leading to the economic crisis that became known as the Great Recession. The conditions are similar to 2008, but experts believe that the market can be leveled rather than collapsed as it did 15 years ago, in that prices have skyrocketed due to a significant increase in demand.

Darryl Fairweather, chief economist at real estate agency Redfin, said: Newsweek In most recessions, home prices are expected to fall by about 2% to 4%. If a crash were to occur now, she would expect a recession to be in that range.

“The Great Recession was an exception,” Fairweather said. “Housing prices have fallen by about 20% because the recession began with the collapse of the housing market. The recession did not cause the collapse of the housing market, but the collapse of the housing market caused the recession.”

Discussions and warnings about a possible home market crash have recently spread as the United States fights rising home prices, rising mortgage rates and 40 years of high inflation in May. In the above, the home was for sale on April 26, 2022 in Chicago, Illinois.
Scott Olson / Getty Images

In order for the market to collapse, the United States will have to see a wave of sellers listing their homes. According to Fairweather, this can happen in the event of a very serious recession, which means people can no longer afford a mortgage.

According to Fairweather, unlike 2008, many homeowners got a “really cheap mortgage” at about 3 percent last year when homeowners couldn’t get it at high interest rates. did. Therefore, they should still be able to afford their payments. Homeowners also achieved “record fairness” last year. This means that the risk of diving underwater in a home is much lower.

In 2008, floating rate mortgages (ARMs) were one of the causes of the collapse of the housing market, according to the Center for American Progress.

According to the Federal Reserve’s handbook, ARM is at higher risk than fixed-rate mortgages, even if it starts at a low interest rate, because that interest rate can change. Higher interest rates can force homeowners who own ARM to pay much higher monthly payments than they originally did.

When the market collapsed in 2008, ARM occupied a much higher percentage of all active mortgages than it does today. ARM currently accounts for 8% of all mortgages, but just before the market collapsed in 2007, ARM accounted for 36%. NBC report.

In addition to the small number of active mortgages today with floating rates, over 80% of ARMs today have been under fixed rates for the first 7-10 years since they were implemented.

Jerry Howard, CEO of the National Association of Home Builders, provided an analysis similar to Fairweather. He does not believe that the value of homes will plummet or that the entire financial system will collapse.

“There will be a slowdown, and there will be some price declines,” he said. He added that falling prices could be “offset” by rising cost of capital. “It will be a different animal than what we experienced in 2008.”

According to the history of the Federal Reserve System, a project that summarizes the history of the central banking system, the housing sector “caused not only a financial crisis, but also a broader economic downturn.” The current concern that the housing bubble could burst is recessionSome experts warn that The United States is heading for one or is already one..

According to the financial website Investopedia, the housing bubble usually begins with an increase in housing demand that matches limited inventories, and housing prices can skyrocket. Even if supply continues to grow due to a surge in demand, the bubble can burst if demand falls or stagnates. This can reduce home prices if new supplies of homes are willing or lacking buyers to pay high costs.

The United States is facing a serious housing shortage, with a conservative estimate of a shortage of about 1 million, while other estimates are close to 3 million.

Kelly Mangold, Principal of RCLCO Real Estate Consulting, said: Newsweek The situation is very different from 2008, where the United States has been building homes “much slower” than demand since the crash.

“Undoubtedly during the last period of the pandemic, what we saw was a shortage of homes in the market,” Mangold said. “We found that prices were getting higher and higher because interest rates were so low at that point. People were basically bidding for shortage.”

Housing competition has cooled a bit since interest rates began to rise, and Mangold said there was still demand for housing, but the bid war as rising interest rates caused affordable price issues for some buyers. Is much less.

Those who can afford to buy a home at their own price still have the opportunity to buy, but others may have to adjust their wish list. Builders and developers are beginning to adjust their vision to match market conditions by bringing to market homes that are slightly smaller in price or more achievable.

“I think such adjustments will be made,” Mangold said. “I don’t think the housing market will collapse significantly unless something amazing happens that isn’t happening right now.”

Neil Shearing, Chief Economist at Capital Economics, an economic research consultancy, said: Market watch The United States should expect home prices to fall as they did about 15 years ago. This is because the surge in mortgage debt helped the last recession, but “the recent rise in home prices is underpinned by very low nominal levels. [and real] Interest rates. “

According to financial services companies, the mortgage delinquency rate in May fell to a record low of 2.75% for the third straight month. Black KnightMortgage debt, which Shirring said boosted the 2008 crisis, shows that it may not be that much of a problem so far.

According to Federal Reserve data, single-family mortgage delinquency rates began to rise sharply in 2007, before the crash, and peaked at 11.36 percent in 2010.

William Wheaton, a professor of economics at the Massachusetts Institute of Technology and a former director of the MIT Real Estate Center, agreed that the current market decline is not like 2008.

“I think the rise could slow down and prices could level off, but we don’t really see what happened in 2008,” he said. “There is no real crisis, but credit is higher. Of course, the last three years have been really really cheap and unusually cheap.”

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