Neel Dhingra compares 2008 and 2020 housing markets to assess crash risk. In 2008, there were 20 months of inventory and 23% of mortgages underwater. In 2020, inventory sits at 2 months, homeowners have record equity, credit standards are strict, and the government responded fast. Conditions are fundamentally different.
Is the housing market headed for another crash? Is this going to be another 2008? Well, stay tuned and I'm going to tell you all the differences before we get into the differences. If you find these videos helpful, go ahead and hit that like button. That's going to help more people see this information. So the first difference I want to go through is the inventory numbers, right? So every market is based on supply versus demand, right? And in 2008, right before housing prices crashed in our market here in Nevada, the inventory levels peaked at 20 months worth of inventory. So there was 20 months worth of homes for sale on the market right before the housing market crashed. Today, in April, May, 2020, there are approximately two months worth of inventory. So it's not even close. So we're not even close to oversupply. Now, just for reference, anything above 6 months supply would be considered a buyer's market. Below 4 months would be considered a seller's market. So we're technically still in a seller's market. Now, that could change as demand slowly abates due to, you know, a little bit of unemployment that we're going to start to see creep into the housing market and other things like that. But as far as the supply numbers go, the supply is nowhere near oversupply levels. The next thing is, is equity in homes, right? So back in 2008, 2009, when the housing market collapsed, 23% of all mortgages were underwater. That means that they had zero equity and they owed more. They were actually upside down. That equates to about 12 million homeowners were literally broke in their house. They were house broke, they were under, they were underwater sinking compared to 2020. Now we have a record amount of equity. So we just had an amazing run of home prices. People are sitting on the most amount of home equity that they've ever seen in the history of the housing market. Now, that could pull back a little bit, but we're nowhere near the levels that you saw in the last crisis where people were drowning. So in a scenario when someone has a significant amount of equity, the likelihood of them walking away from that equity is going to be very minimal. Right. In 2008, they had no choice but to head into foreclosure, head into default because they're upside down, or ask for a short sale because they're upside down. 2020, even if you have a economic disaster, you lose your job, you no longer can make your payments. If you're sitting on a significant amount of equity, you can sell that property, take that equity, and then that will give you a cushion to ride out the storm. The next thing is government action. Back in 2007, 2008, 2009, the government was very slow to react. The housing market caught everybody by surprise. The crash was a slow bleed. Many people called it death by a thousand cuts. So they rolled out several programs, namely TARP and harp. These programs took months to roll out and then they almost a year to implement. So the housing market didn't see the positive effects of government intervention for many, many months. Conversely, 2020, this crisis hit in March. In less than three weeks, the government shot out a bunch of stimulus. Whether that's direct stimulus to people in the form of checks, or whether that was effects of small business lending to affected businesses, whether that's stimulus for disaster loans. All this stimulus has been coming out immediately from the government almost in a fire hose. There's literally cash falling from the sky for assistance right now. And although there's a little bit of difficulty for some people getting that, you can't deny that the government acted extremely quickly this time. Now that's going to cushion the effects because when people receive immediate help, they're less likely to experience a default on their mortgage. The next thing is credit quality. Back in 2008, I was in the mortgage business. Literally anybody who had a pulse could get a mortgage. There was stated income loans, no DOC loans, adjustable rate mortgages, negative amortization. I mean it was just the wild west of lending. And people think it's insane what was going on back in 2008. Today, credit quality has never been better. The average credit score is somewhere in the low seven hundreds. People are making significant down payments for the most part and they have stable employment. It has never been more difficult to get a mortgage. People have to qualify. They have to provide everything except a blood sample. We got a bleeder. So in that type of lending environment where credit quality is extremely high, you can't expect a wave of defaults. So this is nowhere near the low credit quality that we saw in the last crisis. The next thing is interest rates. In 2008, interest rates were in the mid 6% range. Today interest rates are at rock bottom lows in the low threes. So what that means is that homeowners have access to cheap, cheap money which is going to lower their payment to the lowest amount possible, or they can take advantage of refinancing, or they can use that money to purchase property and increase their purchasing power. So we're seeing many homeowners reduce their monthly expenses. And those who can qualify for refinance are taking advantage of this in record numbers right now. That's going to cushion the market from a fall because these people are stable homeowners who have now locked into a 30 year fixed payment at an extremely affordable rate. The next thing is capitalization. So back in 2008, people were very cash poor, they didn't have savings. We'd had so much excess. It was actually cool to spend all your money. I worked with people back in 2008 that literally the money came in, the money went out, people were driving exotic vehicles, had three, four homes, flying first class, taking vacations. It was just extreme excess. Conversely, in 2020, there are many households that have their finances in working order. So what that means is they have stable employment, they have a emergency savings account, they have a 401k, they have a home with equity. When you have that type of financial stability, it's just not possible to see the same level of defaults. So the other thing is, is when home prices do soften the. Because you know, it's expected that home prices will soften a little bit. Same thing that happened with the stock market. As you saw stocks fall, there was plenty of money to come into the market. So what that means is when people have money to invest, they're literally waiting for this to occur. And by default, if there's a ton of people waiting for something to happen, it's less, less likely to happen. So what that means is as prices fall immediately, people are willing to buy and you can already tell because somebody will back out of a deal based on the fact that they think there's going to be a recession or they think prices have further to fall, immediately someone comes in. So when there's people waiting on the sidelines to invest and they have this much cash in the sideline to invest, you can't expect that much of a fall. So those are the main differences that you can share with your clients and you can make an informed decision. So many times clients are asking us, or if you're a client and you're seeing this, you're wondering what's going to happen. I don't feel comfortable buying a property in the midst of a recession. And the truth of the matter is all recessions are different. No two are created equal. The last one was specific to the housing market, this one is more general and each market is going to be different. So it's important to look at the actual numbers, look at the facts, look at the data, and then you can make an informed decision. So I hope this helps. Share it with your clients, share with your friends, family, and if you have any questions, leave a comment below or shoot me a message and I'll see you guys on the next video sat.
