August 2022 Real Estate Market Update | Is This Just Like 2008?

August 24, 2022 | Market Update

Are we headed toward a recession and a real estate market crash? Is this just like 2008 all over again? So let’s talk about what happened in 2008 and if it can happen again!

In my last video, I talked about cutting through the noise. If you missed it, catch it in the link below.

Real estate prices cycle about every 18 years. It’s been that way for 200 years. But not all cycles end in a disaster like 2008.

In fact, during the last 6 recessions, real estate prices rose slightly in four of those years.

Only one recession was like 2008. Why is that? It’s important to know how it happened.

Like today, prices were exuberant and were destined to calm down. But why did the market crash so violently?

That answer falls on some very bad players. The Sub Prime lenders drove the entire economy into a financial tailspin dragging the already strained housing market along with it.

The crash of 2008 began with events that started    years earlier.

Demand for housing was high, Interest rates were low, new home building was everywhere, and everyone wanted to buy a home…even those who couldn’t afford it.

But there was someone who was going to help them out.

Private lenders and their investors were quick to get in on the game. There was money to be made on these risky borrowers.

This opened up homeownership to millions of buyers who couldn’t qualify for a standard loan. Potential home buyers were lured with promises of easy qualifying, and low payments.

But to get them a manageable payment, lenders qualified them on lower variable rate loans with interest only options. That included payments that increased over time and ended with big balloon payments.

All too often, the lender didn’t disclose all the terms. That was loan fraud on an industry wide basis.

Over time, the borrower’s payment would increase. Eventually, the balloon payment would come due. That is a predatory loan and it was imposed on millions of borrowers.

As the demand for homes continued, private banks offered even risker loans. Zero down, easy qualifying, then eventually, NINJA loans.

No Income

No Job

No Assets

No Problem!

What could go wrong?

Sub-prime lenders pushed millions of people with poor credit and a high risk of default, into the home buying market, making it even more competitive than it would have been otherwise.

But it looked great to the buyers! Interest rates were falling and home prices were going up. If you owned a home it was common to refinance over and over and take cash out.

Homes were jokingly called ATM machines as homeowners quickly drained their equity to buy cars, boats, vacations, even college tuitions. After all, mortgage money was cheaper than installment loans. And so much easier to get!

Here’s where the dangerous part comes in.

Those loans were packaged together by the banks as mortgage backed securities, which investors loved because they got paid handsomely every month as homeowners paid their mortgages.

Until homeowners stopped paying their mortgages. This is the straw, that broke the nation’s back. And this is how it started.

October 2007. The stock market began a slide that lost fifty percent of its value over the next 18 months. This spooked home buyers and created wealth losses that cooled the housing market. Without rising house prices, and little equity, homeowners could no longer refinance.

The ATM was closed.

Soon the balloon payments started to come due.

People looked at their homes that had no equity and falling values. With no way out, they quit making payments and lived in the home as long as they could. Then they simply walked away or were evicted.

As more foreclosures came onto the market prices fell further. The wave of foreclosures turned into a tsunami. Over ten million people lost their homes.

The majority of foreclosures during this time were from Sub-Prime mortgages.

Then the bomb dropped. Sept 2008 Lehman Brothers filed the largest bankruptcy in history.

Banks, and investors, and insurance companies that insured the banks were left holding mortgage loans that didn’t get paid. One by one, banks, investment companies, mortgage companies, insurance companies, and new homes builders closed their doors and over $400 billion dollars was lost.

With so many foreclosed homes coming onto the market, you’d think buyers would want to step in and take advantage of the opportunity.

But here’s the final blow.

The collapse of mortgage institutions created a national crisis. Traditional mortgage money tightened and lender’s reverted to the Old rules of 20% down, perfect credit and great employment stability. But qualified buyers were far and few between.

The stringent lending criteria made it difficult for buyers to obtain loans so the market continued to slide even further.

Finally, the Feds completely overhauled the mortgage industry in 2011, instituted short sale guidelines that made it easier to purchase homes in foreclosure and the market slowly began to recover.

Then the cycle began again.

So what’s different today?

First, homeowners have more equity and savings than any other time history. That’s the opposite of 2008. The average homeowner today has $185,000 in equity.

Second, lenders are following tight lending guidelines with stricter regulation and consumer protection. The years leading up to 2008 had none of these.

Third. Mortgage delinquencies are at an all time low. The fears that COVID moratoriums on mortgage loans would create mass foreclosures just didn’t happen.

Because so many homeowners had equity, they worked hard to repay or recast their payments. And if a life circumstance requires them to sell, they have the equity to do it.

Four. Supply and Demand. Housing inventory is still well below a normal market. Here in Ventura County we have 1.9 months of inventory. Typically, a normal market with mild appreciation has 5-6 month of inventory. Even though our time on market is increasing, we’re well below that today.

Plus, buyers are actively buying. While interest rates have taken about 30% of the buyers out of the market, others are moving forward to beat possible further rate hikes and housing appreciation.

Don’t forget the Millennial buyers. They are the largest demographic since the Boomers of the 60’s. They have money, have been saving and need their own housing. Demand and desire still exist for housing.

Throughout my career of over 35 years, there have been plenty of ups and downs. And people always ask, “is this a good time to buy.”

We’ve seen a lot of graphs today but there’s one I want to leave you with.

I refer them to this graph.

And I ask them, point to a time that you would have regretted buying a house?

Think about it. When, over the last 50 years, was it ever a bad time to buy property?

I’m not talking about a flip or short term speculation.

I’m talking about the house you will own for long term. The one with a fixed payment for life. To avoid paying rising rents and making your landlord richer. To hedge against inflation.

When was it a wrong time to buy that house?

Of course, everyone points to 2008. Yeah, I get that. That was the worst loss in nearly a century. But jump ahead three years. You’re even. Now 10 years later. Now today.

It’s worth looking at your situation to see if you should be considering buying or selling a property.

If you need a home, it’s still a good time to buy one. But it may not be for everyone, depending on their life situation.  We’re always here, willing to have a conversation to help you decide what is right for you.

I’m going to cover some of those scenarios in our next video.

We’ve worked with clients through four recessions. Experience yields a lot of knowledge and we’re always looking forward to sharing that with you.

I’m Jim Holbrook. Thanks for watching. Remember to hit like, subscribe and share… and take care.