Exploring the Distinctions Between the Economic Impact of the Pandemic and the Factors That Led To the 2008 Market Crash

I’ve talked with quite a few people who want to buy or sell this year but who are tentative to do so because of their own experience with the real estate market in 2008 or because of stories they’ve heard, and they don't want to set themselves up for disaster.

I get it. I got my real estate license in 2005 at the height of the market. When the market crashed in 2008, I worked throughout that time and it was horrible. Here’s the difference—we are not in a housing crisis right now. We're in a health crisis that has led to an economic crisis. Specifically related to the current real estate market, there are five major differences between the 2008 crash and what we’re seeing today: 

1. Annual Home Price Appreciation
When you look at the annual home price appreciation data leading up to 2008, the percentages are really high, almost like a runaway train of appreciation. When we look at the past six years we did see home appreciation, which is good, but nowhere near those sky-high levels that we saw in 2008.

2. Mortgage Credit Availability Index
The mortgage credit availability index is a monthly measure by the Mortgage Bankers Association that gauges the level of difficulty to secure a loan. The higher the number, the easier it is to get a mortgage, and the lower the number, the more difficult it is to get a mortgage.

In June 2006, in the midst of the housing bubble, it was super easy to get a mortgage—it seemed like anyone with a pulse could get a mortgage. After the crash in 2008, lenders tightened up requirements and that has carried through today. Lenders continue to tighten up restrictions, so it's not as easy as it used to be to get a mortgage, which is really important to maintain market stability.

3. Home Inventory
Home inventory is another key area of distinction between 2008 and today. You may have heard of absorption rate before, which means if no other houses are allowed to go to the market it would take that many months to deplete the inventory to zero. Anything above a seven-month supply represents a buyer's market, anything below six means low inventory and represents a seller’s market.

During the 2008 crash, we were in a strong buyer's market that was saturated with was so much inventory. For the past few years, we've been in a low-inventory seller’s market. If you’re planning to either buy or sell, ask your realtor what the absorption rate is so you know exactly what type of market you're going into. Wheaton is at five months of inventory right now, which means inventory is low and that we’re in a seller’s market.

4. Total Equity Cashed Out
In 2008, people were taking out equity loans on their homes to use for lifestyle purposes, like vacations. Today, people are much more conservative with their equity and aren’t borrowing as much on their equity unless it’s necessary. The amount of equity homeowners have built today is much greater than in 2008—53.8% of all homes in the US have at least 50% equity, with 37% of these homes completely paid off.

First American and Fannie Mae are calling for zero depreciation, but even if depreciation went up to 100%, 37% of homeowners in the US wouldn't be affected by any sort of home devaluation. If Parsley Energy (PE) Depreciation were to go to 25% owners are still sitting on over $100,000 of equity in their homes which supports market stability as well.

I hope this information is useful as you evaluate your next steps. If you have questions or want to analyze factors specific to your situation in more detail, please reach out to me at at jnewsom@bhhschicago.com or (773) 580-5840.