Why Today’s Housing Inventory Shows a Crash Isn’t on the Horizon

The Housing Market Then and Now

Many remember the housing crash of 2008, a time of financial turmoil and uncertainty. If you're concerned about the possibility of a repeat, there's reassuring news – the housing market today is vastly different from what it was in 2008.

The key difference lies in the housing supply. Unlike the oversupply of homes that contributed to the crash in 2008, today's market faces a shortage of available homes. To trigger a market crash, there would need to be a surplus of houses for sale, but current data does not support that scenario.

Housing supply primarily originates from three sources:

1. Homeowners deciding to sell their houses.

2. Newly constructed homes.

3. Distressed properties, including foreclosures and short sales.

Let's delve deeper into today's housing inventory to understand why the current situation is unlike 2008.

Homeowners Deciding To Sell Their Houses

While housing supply has increased compared to the previous year, it remains relatively low. The current months' supply is below the historical norm. A glance at the graph below highlights this disparity. When comparing the latest data (shown in green) to the levels in 2008 (shown in red), it becomes evident that available inventory today is only a fraction of what it was back then.

So, what does this mean? Simply put, there are not enough homes on the market to cause a significant drop in home values. A repeat of 2008 would require a surplus of homes for sale and a shortage of buyers, a scenario that is not unfolding at present.

Newly Built Homes

There has been much discussion about the construction of new homes, leading some to wonder if builders are overextending themselves. The graph below illustrates the number of new houses constructed over the past 52 years:

The 14 years of underbuilding (indicated in red) are a significant factor contributing to today's low housing supply. Builders have not been constructing enough homes for an extended period, resulting in a substantial supply deficit.

While the final blue bar on the graph signifies an increase in construction, approaching the long-term average, it will not create an oversupply. The gap is simply too substantial to bridge. Moreover, builders are cautious about overproducing homes, having learned from the mistakes of the housing bubble.

Distressed Properties (Foreclosures and Short Sales)

During the housing crisis, a surge in foreclosures occurred due to lax lending standards that enabled many unqualified individuals to obtain home loans.

Today, lending standards are considerably stricter, leading to a more qualified pool of buyers and far fewer foreclosures. The graph below, based on data from the Federal Reserve, illustrates this transformation since the housing crash:

As lending standards tightened and buyers became more qualified, the number of foreclosures declined. In 2020 and 2021, the combination of foreclosure moratoriums and the forbearance program helped prevent a repeat of the foreclosure wave seen around 2008.

The forbearance program was a game-changer, offering homeowners options such as loan deferrals and modifications that were previously unavailable. Data on the program's success reveals that four out of every five homeowners exiting forbearance either paid their arrears in full or established a repayment plan to avoid foreclosure. These factors underscore why we won't see a flood of foreclosures hitting the market.

What This Means for You

Inventory levels are far from the point where significant price declines and a housing market crash could occur. According to Bankrate, this situation is unlikely to change in the near future, especially given the persistent strength of buyer demand:

"The ongoing scarcity of inventory explains why many buyers still have little choice but to bid up prices. It also suggests that the supply-and-demand dynamics will not allow for a price crash anytime soon."

In conclusion, while concerns about housing market stability are valid, the current landscape, characterized by limited housing supply and stringent lending standards, is fundamentally different from the conditions that led to the crash of 2008. Therefore, a housing market crash is not on the horizon.

For personalized advice and to stay informed about the latest developments in the real estate market, consult with a trusted real estate professional.

Disclaimer: The information provided in this article is for general informational purposes only and should not be considered professional advice. For personalized guidance regarding real estate or financial matters, it is recommended to consult with qualified professionals.