The current housing market is distinctly different today than in 2007-2008.

Housing Market Before

In 2007-2008, the housing slowdown largely resulted from speculation in the market. An (admittedly) oversimplified description of events follows. Consumers felt home prices would continue to rise. Banks provided credit freely to buyers in the form of subprime mortgages with adjustable rates. Interest rates were low at the inception of the mortgage but adjusted higher later. Buyers had confidence that home values would rise indefinitely and they could refinance down the road. Instead, home values failed to appreciate, mortgage rates rose, and borrowers defaulted en masse. [1]

Housing Market Today

Today, the housing market is again feeling a pinch but not from speculation. Rather, the current market faces a supply/demand imbalance made more complex by persistent inflation. After the fallout of the housing market crash, the industry pulled back on construction, falling below the long-term average of 1.5 million starts (see Figure)[2]. Consequently, the U.S. accumulated a housing deficit from years of underbuilding. This difference persists today despite the blistering pace of housing starts over the past two years, rising above 1.5 million starts in 2021 for the first time in more than a decade. Recent estimates place the current deficit somewhere between 1.5 and 6 million homes.[3]

Figure 1: New Privately-Owned Housing Units Started, unadjusted. Area in red shows years of housing starts below long-term average.

The pandemic further exacerbated this issue. Supply chain disruptions resulted in key product shortages across the housing sector, lengthening the time between starts and completions. Construction failed to keep pace with rising demand brought on by a combination of low interest rates and increased consumer savings. The U.S. Census Bureau’s Monthly Supply Index[4], a measure of the size of the new for-sale inventory compared to the number of houses sold, reflected this shortfall. In August of 2020, the index fell to 3.3, the lowest value ever recorded. This implied an inventory of 3.3 new homes for every one sold, a clear indication of limited supply.

Additionally, persistent inflation over the past year resulted in the Federal Reserve raising interest rates. Mortgage rates rose in turn and current buyers face an affordability crisis. Housing prices rose 45% from January 2020 to June 2022[5]. Prices moderated from their June peak but remain elevated historically, up 5.8% year-over-year and 26% over two years. Potential buyers are now saddled with higher mortgage rates (an average of 6.26% in February[6]) and high home prices, a less than desirable combination. As mortgage rates rose over 2022, affordability worsened, and buyers were less willing to accept higher payments.

Currently, potential homebuyers are caught in an affordability crisis, with many choosing to delay purchasing in hopes that house prices and/or interest rates will fall in the future. Although, supply remains limited from the housing deficit despite some recent cooling of demand. As a result, while prices may dip, they are not forecast to collapse.

[1] Kosakowski, P. (2023, February 12). The fall of the market in the fall of 2008. Investopedia. Retrieved March 21, 2023, from https://www.investopedia.com/articles/economics/09/subprime-market-2008.asp#:~:text=In%202008%2C%20the%20housing%20market,defaulting%20on%20the%20home%20loans.

[2] U.S. Census Bureau and U.S. Department of Housing and Urban Development, New Privately-Owned Housing Units Started: Total Units [HOUSTNSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HOUSTNSA, March 21, 2023.

[3] Siegel, R. (2023, January 26). White House unveils new tenant protections amid soaring rental costs. Washington Post. Retrieved March 17, 2023, from https://www.washingtonpost.com/business/2023/01/25/white-house-renter-protection/

[4] U.S. Census Bureau and U.S. Department of Housing and Urban Development, Monthly Supply of New Houses in the United States [MSACSR], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MSACSR, March 14, 2023.

[5] S&P Dow Jones Indices LLC, S&P/Case-Shiller U.S. National Home Price Index [CSUSHPINSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CSUSHPINSA, March 14, 2023.

[6] Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US, March 14, 2023.