Is the Housing Bubble Worse than 2008?

During 2022 the Federal Reserve Bank forcefully raised interest rates 7 times. The goal: “to reduce red-hot inflation rates that are eating into the purchasing power of everyday Americans without sparking a recession.”

The market has reacted in a way that signals that a recession is here to stay for awhile. In 2022 we witnessed the stock market had its worse performance since 2008, bitcoin collapsed and real estate sales declined by 35.4% from the previous year according to the National Association of Realtors.

However, is the current market bubble worse than 2008? The answer is a loud YES!

As we can see in this chart, the 2008 housing bubble was significantly small in comparison with the levels we have reached in 2022. According to Real Investment Advice, “At that previous peak in 2007, the equity in people’s homes was around $15 trillion, while mortgage debt stood at $9 trillion. When the bubble popped, home prices collapsed, flipping homeowner’s equity from positive to negative. Home equity is roughly $30 trillion, while mortgage debts have increased to roughly $12 trillion. That is an incredible spread, unlike anything seen previously.”

However, during this time the housing bubble came as a result of lax underwriting by mortgage companies. The current bubble was largely caused by the massive money printing during COVID-19 lockdowns.

The Federal Reserve Bank of Dallas describes the reasons “Why House Prices Surged as the COVID-19 Pandemic Took Hold:”

• The acceleration in house prices immediately following the COVID-19 recession was very different from the steep decline triggered by the subprime bust in the February 2007 to June 2009 Great Recession.
• Unlike the lead-up to the Great Recession, homeowners were not overleveraged, and lending standards were not too loose. During the pandemic, large transfer payments that included stimulus checks and extended/expanded unemployment benefits boosted household incomes. As a result, household incomes and housing demand did not collapse when unemployment spiked to a seasonally adjusted 14.8 percent in April 2020 (from 4.4 percent a month earlier).
• Very low mortgage interest rates, reflecting market forces and very accommodative monetary policy, raised the demand for housing
• The pandemic also boosted the demand for housing by increasing the need to work from home and for more socially distanced housing away from dense urban areas, especially in major cities. The former is reflected in a rise in relative prices of larger suburban homes and the latter in a rise of single-family housing relative to multifamily construction.

Will the Bubble Burst be Worse than 2008 Housing Crash?

In will largely depend on housing supply AND unemployment.

Real Investment Advice says that “there are three primary issues that lead to changes in the supply of housing:“

1. Prices rise to the point that sellers come into the market.
2. Interest rates rise, pulling buyers out of the market.
3. An economic recession removes buyers due to job loss.

“When those occur, transactions slow down, and inventory rises sharply.” And as a result we housing prices decrease.

Housing Supply

The housing supply has been artificially manipulated by government policies during the pandemic and depending on who you ask, experts believe there is a nationwide housing shortage of between 2 million to nearly 6 million newly built homes. 

In normal times, new construction gradually increases the supply of housing. However, the recent supply response has been muted relative to the rise in prices, and the price response has been magnified by pandemic-related supply constraints. Those constraints include disruptions to supply chains for building supplies and restrictions on work practices.

Additionally, federal and other moratoriums on homeowner evictions and extensive modifications of mortgages by the Federal Housing Administration (FHA), Fannie Mae, Freddie Mac and other lenders prevented a surge in fire sales of repossessed homes that would have otherwise depressed house prices.

Homeowners who have already secured their homes at very low interest rates are not inclined to sell their homes. Because the new mortgage payment for a similar price range will likely be double the payment. Thus this will contribute to low supply of homes for sale.

Unemployment

Fed Chair Jerome Powell on acknowledged that rate hikes would cause pain for the U.S. economy, as growth slows and unemployment rises.

According to the Conference Board “The unemployment rate is projected to reach almost 4.5 percent in 2023, up from 3.5 percent in September 2022.”

• The tech sector is starting the new year on just as shaky ground as it left the last: 150,000 tech workers lost their jobs in 2022, with more than half of them happening in November and December alone, according to Layoffs.fy
• Tesla, Netflix, Coinbase, and Robinhood have all announced layoffs in recent months, citing reasons ranging from rising inflation to a disastrous crypto market. There are signs those downturns are heading for Big Tech giants as well.
• According to data collected and recently released by the Bureau of Labor Statistics (BLS), food services and related businesses suffered the highest rate of departing employees between August 2021 and August 2022

Home Prices will Fall

The concern is that as excess liquidity continues to leave the economic system. That drain of liquidity, coupled with higher interest rates, and less monetary accommodation, will drag home prices lower. Specially new buyers “home equity” may dissipate as homeownership costs continue to rise due to higher rates and inflation. And that it will be panic rather than need that will drive many homeowners to sell.