Coronavirus Will Cause Real Estate Market Crash Similar to 2008?
By Realtor Bobby Freeman
SPACE COAST DAILY TV: Bobby Freeman from McCoy-Freeman Real Estate talks about the housing market on Space Coast Daily TV amid the Coronavirus Pandemic.
As the country continues to feel the impact of the Coronavirus (COVID-19) outbreak and volatility in the stock market, it’s caused many of my clients to contact me regarding Florida’s real estate market.
The main question I am getting is, “Will there be another housing crash similar to 2008?
In my professional opinion, the answer is NO.
There are many reasons indicating this real estate market is nothing like 2008.
1. Mortgage standards are nothing like they were back then.
During the housing bubble, it was difficult NOT to get a mortgage. Today, it is tough to qualify. The Mortgage Bankers’ Association releases a Mortgage Credit Availability Index which is “a summary measure which indicates the availability of mortgage credit at a point in time.”
The higher the index, the easier it is to get a mortgage. As shown below, during the housing bubble, the index skyrocketed. Currently, the index shows how getting a mortgage is even more difficult than it was before the bubble.
2. Prices are not soaring out of control.
Below is a graph showing annual house appreciation over the past six years, compared to the six years leading up to the height of the housing bubble.
Though price appreciation has been quite strong recently, it is nowhere near the rise in prices that preceded the crash.
3. We don’t have a surplus of homes on the market. We have a shortage.
The months’ supply of inventory needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued appreciation. As the next graph shows, there were too many homes for sale in 2007, and that caused prices to tumble. Today, there’s a shortage of inventory which is causing an acceleration in home values.
4. Houses became too expensive to buy.
The affordability formula has three components: the price of the home, the wages earned by the purchaser, and the mortgage rate available at the time.
Fourteen years ago, prices were high, wages were low, and mortgage rates were over 6%. Today, prices are still high. Wages, however, have increased and the mortgage rate is about 3.5%.
That means the average family pays less of their monthly income toward their mortgage payment than they did back then. Here’s a graph showing that difference:
5. People are equity rich, not tapped out.
In the run-up to the housing bubble, homeowners were using their homes as a personal ATM machine. Many immediately withdrew their equity once it built up, and they learned their lesson in the process.
Prices have risen nicely over the last few years, leading to over fifty percent of homes in the country having greater than 50% equity. But owners have not been tapping into it like the last time. Here is a table comparing the equity withdrawal over the last three years compared to 2005, 2006, and 2007.
During the crash, home values began to fall, and sellers found themselves in a negative equity situation (where the amount of the mortgage they owned was greater than the value of their home). Some decided to walk away from their homes, and that led to a rash of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of other homes in the area. That can’t happen today.
Watch the above Space Coast Daily TV video with Florida’s Space Coast Real Estate expert Realtor Bobby Freeman with McCoy Freeman Real Estate and contact Bobby Freeman for more information at 321-693-1694