The housing market has come to a near standstill in the last few months, leading some to speculate it could be headed for a “crash,” an undefined state in which home values fall.
It’s happened before, as recently as 2009. Then, thousands of homes went into foreclosure and millions of homeowners found themselves owing more than their homes were worth.
Could it happen again? Most housing experts point out that today’s market woes are very different from 13 years ago.
Today, the market has stalled for one big reason – rising mortgage rates. During the COVID-19 pandemic, the housing market exploded. Prices surged because demand far outweighed supply.
Low interest rates fueled record home prices
People with good jobs could afford to pay record-high prices for a home because the interest rate was 3% or less, providing an affordable monthly payment. But when the average 30-year fixed-rate mortgage rate surpassed 7%, as it did last month, then the monthly payment was hundreds of dollars higher, meaning many people who would like to buy a home can no longer afford to.
As a result, home prices have already fallen from their record highs reached in June. But Alex Platt, principal agent with the Platt Group, part of Compass Real Estate in Boca Raton, Fla., says that is far from a “crash.”
“Look, no one knows what’s going to happen,” Platt recently told us. “But I don’t think there’s going to be a big ‘crash’ coming. Could there be a correction, sure? But prices nearly doubled in the last two years. So even if prices come down 10 or 15%, the market is still up.”
But what about people who purchased homes last year, at the very top of the market? Could they trigger a crash, much like they did in 2009? Not really, experts say.
Most people who purchased homes in 2021 got a mortgage rate of 3% or less. As long as they stay employed they should be able to easily swing the monthly mortgage payment.
What's different this time?
So how was 2009 different? At that time, the mortgage industry was approving loans to just about anyone, whether they could afford the home or not. The lender sold the mortgage to Wall Street investment banks within days so lenders didn’t care.
Many of these buyers put no money down and took out subprime mortgages, which had a low “teaser” interest rate for the first year or two before the rate jumped to double-digits. When that happened, millions of those homes went into foreclosure, dragging home values down with them. It was the wave of foreclosures that triggered the crash, flooding the market with repossessed homes.
Today, very few homes are in danger of default, even those whose values are now lower than the purchase price. Unlike more than a decade ago, most of today’s buyers made significant down payments – of up to 20% – and still have some equity even if prices go down.
People who bought homes at the top of the market may feel like there’s a housing market crash, at least for a while. But most real estate economists predict the market will quickly right itself if prices fall too low.
Realtor.com notes that, unlike in 2009, the U.S. still has a severe housing shortage. Even with rising interest rates, demand is expected to exceed – or at least keep up with – the supply of homes.