Since home values appreciate at a rate greater than inflation, home ownership has often been considered the best way to secure generational wealth. It’s understandable, then, that new home buyers would like to know if there’s a housing market crash on the horizon, especially if they’re old enough to remember the Mortgage Crisis of 2007-2009.
What happened back then?
Between 2000 and 2006, home prices skyrocketed 84%. Soon after that, the U.S. fell into the deepest economic downturn since the 1930’s.
Similarities between 2022 and the early aughts are certainly alarming. According to the Federal Reserve Bank of Dallas, current housing prices are misaligned with market fundamentals. This “abnormal U.S. housing market behavior” is being seen for the first time since the boom of the early 2000’s.
So, will it all play out just like it did in 2008?
Not unless there were sudden, major changes in current lending practices, which—frankly—isn’t going to happen. Why? Due to several legislative, demographic, and economic factors. Let’s have a look.
Back in 2010, subprime mortgages that fueled the housing bubble were outlawed with the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Now, lending standards have tightened. And although adjustable-rate mortgages are seeing a surge in popularity in 2022 due to high interest rates, this doesn’t mean a large percentage of mortgage holders will default on their loans and cause a crash. According to Jude Landis at Fannie Mae, "Improvements in underwriting, technology, and quality controls—some visible, some less so—have resulted in a fundamentally sounder mortgage system than before the crisis of 2008." These regulations ensure that borrowers demonstrate an ability-to-repay, and also protect them from predatory lending practices. Essentially, the mortgage industry is “fundamentally healthier” than in 2008.
What other factors need to be considered?
Millennials, currently the largest demographic of home buyers, need places to live and it’ll be at least 1-2 more decades before the population of Boomers begins to decline.
That fact, combined with the large percentage of institutional investors gobbling up affordable homes, as well as delays in new home construction caused by supply chain issues, has kept demand high despite rising prices and interest rates.
But those rising prices mean a bubble, don’t they? And won’t that bubble burst?
Not necessarily. As Lance Lambert at Fortune explains, “A housing bubble requires both a rush of speculators entering into the market and overvalued home prices.” That’s not what’s happening in 2022. There’s no “frenzy of speculation.”
According to Mark Zandi, chief economist at Moody’s, we’re nowhere near risking any crash like in 2008 due to inventory being at a record low. “This is the exact opposite of the situation during the 2007-2008 housing bubble when vacancy rates were at a record high. Building supply will increase as supply chain issues iron out. Inflation has peaked [and] will be meaningfully moderating by this time next year.” He predicts a "housing correction," with, at most, 5% to 10% price reductions in more “overvalued” housing markets.
In fact, in a recent Pulsenomics survey, only 20% of the economists questioned thought home prices could decline over the next five years. Daryl Fairweather, chief economist at Redfin, says that popular Sun Belt communities will likely experience continued price growth.
Fairweather specifically mentions the Los Angeles market when discussing where prices are headed. She foresees the rate of values slowing, but suggests that home prices won’t actually drop. Potential buyers might be interested to know that “the double-digit year over year price growth we’ve been experiencing is likely to drop into the single digits in the coming months.” Additionally, those “who have lost out on several bidding wars may find they’re facing less competition from other buyers than they were a month or two ago.”
So, if we’re not in a bubble, and the housing market isn’t going to crash, what’s going to happen?
Selma Hepp, deputy chief economist at Corelogic told Bankrate that home values will continue to appreciate while demand remains strong. In fact, a recent forecast from Corelogic projected that home prices will continue to increase 1.2% on a month over month basis, but “annual U.S. home price gains are forecast to slow to 5.6% [year-over-year] by April 2023 as rising mortgage rates and affordability challenges impede buyer demand.”
The economists at Fannie Mae and Freddie Mac share similar projections: that home prices will continue to increase, though at a reduced rate. Freddie Mac projects home prices will continue to grow 2.2% in Q3 with the rate dropping slightly to 1% appreciation by the time we get to Q2 in 2023. Fannie Mae’s forecasting, meanwhile, indicates that this combination of reduced demand and reduced inventory will result in housing prices continuing to rise through Q2 of 2023 though at a slower rate than previous months. By Q4 of 2023, values will still be appreciating at a rate of 3.2% according to Fannie Mae’s projections.
What’s it all mean for Chino Hills?
Chino Hills is actually in an area with a very low chance of home prices dropping, according to recent analysis from Corelogic. In this map put together by Fortune using Corelogic’s data, you’ll see that San Bernardino County falls into the “low” range with only 20-40% chance of a price dip over the next 12 months—an assessment based on factors such as income growth projections, unemployment forecasts, consumer confidence, debt-to-income ratios, affordability, mortgage rates, and inventory levels.
The most important factor: you and your goals.
A 30-year fixed-rate mortgage has long been considered an excellent hedge against inflation. If you’re planning to buy your forever home, short term dips and downturns won’t matter. Looking at the numbers from Robert Shiller, who put together a database of U.S. home prices from 1890 to present, you’ll see that the total return on investment for housing is .5% above inflation year over year since the end of the 19th century. If where you live is going to end up earning you even a small amount every year, that’s undeniably a better deal than paying someone else’s mortgage—which is essentially what happens when we pay rent.
Have more questions about the housing market? Want help tackling the intricacies of your financial needs?
At Park Group Real Estate, our team is devoted to studying the market and understanding the situations of individual homeowners, buyers, and sellers. If you’d like to discuss the specifics of your goals, reach out. We love to help people make the right real estate moves.
PS - If you're ready to buy or sell real estate in Chino Hills today, we're ready to help you do it. Give us a call at 909-403-4085 and an expert agent will reply with next steps ASAP.