Insight provided by Ian Bushnell, originally published on October 12th, 2021.
“Why would you get yourself involved in real estate right now? Don’t you know what happened in the past with the housing crash…what goes up must come down.” While not always the case, this is an example of a speculative conversation about real estate. Sure, the past may repeat itself, but there are numerous factors that would not support that outcome. In fact, there are quite a few reasons why this conversation is not accurate. In this article, I am going to explain some of the key factors that have been affecting the real estate market recently, and why it is not likely that we will experience a crash similar to the housing crash of ’08.
Depending on who you are, this article might resonate differently with you. Are you a buyer or a seller, an investor, or an aspiring industry professional? Regardless, this information is relevant to all. With the COVID-19 impact payments made to all Americans, some owners of real estate decided to invest their extra money back into their homes, whether by making improvements, or paying down the principal on their loans. These choices led to an increase in the home owner’s equity. During the pandemic, demand for real estate decreased as people were not looking to relocate due to the increased popularity of working from home. As a result, interest rates on lending decreased — and not long after that, the demand for buying increased as record low interest rates reached nearly 3% from 12/19 to 01/20 (Bankrate).
Thus far, we have discussed how COVID-19 has impacted buying power and led to a decrease in demand, which then adversely affected the demand for real estate when interest rates decreased. Now, we can talk about why the Real Estate market has been so hot. The expression “what goes up, must come down” is a statement that is true within reason. In terms of the market, I do not believe we are headed for another market crash. When we think about the roots of the 2008 housing crash, it was during a time when there were risky lending practices happening left and right and was an invitation for what was to come.
In 2021, a few key factors that will prevent a market crash similar to the one in 2008 include higher lending standards, pandemic mortgage forbearance, and home owner’s equity. Higher lending standards refers to the rigorous income and asset checks that occur throughout the application process when trying to obtain financing. These safety measures are all thanks to the inception of the Consumer Financial Protection Bureau (CFPB) which was established to help support the regulatory framework.
Pandemic mortgage forbearance, also known as mortgage forbearance plans is an option for those who are experiencing financial hardship and are financially incapable of repaying their current debt. Due to the pandemic and the uptick in unemployment rates, homeowners that were delinquent would not face the inevitable fate of simply losing their homes; rather, they would be offered plans such as the pandemic mortgage forbearance to accommodate them and allow them to postpone their payments. As of early March 2021, 2.6 million homeowners’ mortgages were in such forbearance plans. As the pandemic economy has slowly recovered, many homeowners have since resumed employment and are paying their home payments. According to CoreLogic, by the end of 2020, overall mortgage delinquencies declined 5.8% due to the forbearance program (azbigmedia).
Lastly, owner’s equity is the part of homeownership that is in my opinion most valuable, and what buyers strive for when acquiring real estate. This is the part of homeownership that acts as a piggy bank because you own a percentage of the value of your property. Additionally, as home values appreciate, the equity in a property also increases and in the event of a market dip, your equity can act as a cushion. For responsible buyers, using equity in your home can unlock potential savings for refinancing or other financial goals. Overall, with market appreciation and more equity being unlocked, there are incentives to keeping your home that have not been available in the past.
In 2021, there are numerous factors which help indicate that a housing crash is far less likely than some believe. Sure, it could happen, but based on the vast amount of research and data available, it would be safer to conclude it is not the fate of the housing market. Whatever side of the transaction you may be on in this ever changing market, it is important to know the facts.
https://www.nhar.org/assets/pdf/marketdata/yearoveryear/98-20_statewide_only.pdf (NH Single Family Home sales 1998–2020)
https://www.nar.realtor/research-and-statistics/quick-real-estate-statistics (NAR membership stats Jan 21-Present)
https://www.nar.realtor/membership/historic-report (NAR membership stats 1908–2020)
https://www.bankrate.com/mortgages/mortgage-rate-forecast/ (mortgage rage forecast)
https://bettermoneyhabits.bankofamerica.com/en/home-ownership/evaluating-home-equity (home equity run-down)
https://www.investopedia.com/articles/mortgages-real-estate/08/housing-appreciation.asp (calculating home value)
https://www.bankrate.com/mortgages/types-of-mortgages/ (5 types of mortgages)
Ian Bushnell is a senior from Haverhill Massachusetts, he is currently a Business Administration major who plans to focus in Finance and IBE. On-campus, Ian is also involved as a brother of Alpha Kappa Psi, the professional business fraternity, and a Peer adviser for the FIRE program. Some of Ian’s interests outside of the classroom include real estate, traveling, photography and skiing.