It is understandable why many people are afraid of the possibility of another real estate market collapse, especially considering the economic downturn experienced in 2008. However, there are many significant differences between the housing market of 2008 and the current market of 2023. Not only have lending practices and loan approval processes become more stringent, but the market itself has also become much more stable and secure. In this blog post, we will be discussing these differences in detail to show why there is no need to fear another real estate market collapse.
The Subprime Mortgage Crisis
The Great Recession of 2008 had a huge impact on the housing market, with one of the primary drivers being the collapse of the subprime mortgage industry. The subprime mortgage crisis began when the housing bubble of the early 2000s burst, causing home prices to plummet and millions of homeowners to be underwater on their mortgages. These homeowners were unable to keep up with their payments, resulting in a wave of foreclosures that further drove down property values.
Subprime mortgages are loans given to borrowers who have less than perfect credit, but due to the reckless lending practices employed by lenders during this time, these mortgages became much riskier than they should have been. Many borrowers were able to take out mortgages without having the ability to make their payments, leaving lenders with huge losses. This led to a cycle of defaults and further losses for lenders, ultimately leading to the collapse of the entire subprime mortgage industry.
Changes in the Housing Market
The housing market of 2008 and the one in 2023 could not be more different. After the subprime mortgage crisis, banks became much more cautious when approving loans, and have since then implemented better lending practices to help prevent another crisis. This has resulted in significantly fewer risky mortgages being approved.
One example of a major change is the increase in down payment requirements. In 2008, many people were able to buy a home with no money down, or only a small down payment. Now, down payments are much larger, with an average of 20% of the total cost of the home.
Additionally, credit score requirements are now much stricter than they were in 2008. Before the crisis, people with lower credit scores were often still able to qualify for a mortgage loan. Now, most lenders want applicants to have a credit score of at least 700, although some lenders may accept lower scores.
To protect themselves against defaults, banks also require that borrowers purchase private mortgage insurance. This can add significantly to the cost of a loan, but it helps ensure that lenders are compensated if borrowers default on their payments.
Finally, home values have increased significantly since 2008. As a result, the number of distressed properties is much lower than it was prior to the crash. The combination of stricter loan requirements and higher home values provides much greater security to lenders and makes it less likely that another crash will occur.
Improved Lending Practices
The lending practices of the mortgage industry have improved significantly since the Great Recession in 2008. Mortgage lenders are now more stringent when it comes to approving loans, as they have adopted stricter lending standards. This has led to increased security and stability in the housing market.
Lenders now look more closely at borrowers’ income and creditworthiness, ensuring that applicants can meet their financial obligations. This has led to fewer defaults on home loans, which has resulted in fewer foreclosures and a healthier housing market.
Lenders also pay closer attention to the properties being purchased. They ensure that appraisals accurately reflect the true value of the property, which has helped mitigate the risk of fraud and misrepresentation.
In addition, lenders have implemented new rules and regulations to help protect borrowers from predatory lending practices. This includes restricting balloon payments and limiting the amount of interest that can be charged on certain loans.
These improved lending practices have helped reduce the risk of another real estate market collapse, as they have increased market stability and security. This has helped create an environment that is conducive to sustained growth in the housing market.
Market Comparison from 2008 and 2022
When looking at the housing market in 2008 and comparing it to the market today, there are several differences. The unemployment rate in 2009 was 10%, compared to the 3%-4% rate of 2020. Consumer confidence in 2009 was at 27.5, which has steadily risen over the years and was much higher in 2020.
The subprime mortgage crisis of 2008 is one of the main differences between the housing market of then and now. Banks were offering mortgages to people who did not have the income or ability to pay back the loan. This led to a large number of foreclosures and an unstable market. In contrast, the current housing market is much more stable.
Lending practices have become much more stringent, making it difficult for those without the necessary qualifications to receive loans. This has led to a decrease in foreclosures and an overall improvement in the health of the market.
The implications of this comparison for investors are significant. With better lending practices and higher consumer confidence, the current housing market is much more stable than it was in 2008. Investors can be confident that their investments will remain secure as long as they take appropriate precautions when investing in real estate.
Stop Waiting For The Market To Crash
The real estate market is constantly changing, and while it may seem like the smartest decision to wait for the market to crash before making a purchase, this can be a costly mistake. In the past, buyers may have been able to take advantage of prices falling in the wake of the Great Recession, but that does not mean that it will happen again. Today’s real estate market is much more stable than it was in 2008, due to improved lending practices and increased market oversight.
Buyers should not wait to buy a home in anticipation of a future crash. By waiting, they are putting themselves at risk of missing out on low interest rates and high demand in certain areas. Instead of waiting for the bottom to fall out of the market, buyers should take advantage of the current stability. If they research carefully, they can find great deals that still allow them to make a sound investment without fear of a sudden collapse.
Ultimately, buyers should focus on finding the right property at the right price point, rather than trying to time the market or make decisions based on fear. A wise purchase today could lead to an even wiser purchase in the future, as the market continues to stabilize and shift.