Are Home Prices Today Comparable to Where it was Before the Great Recession?

How Much
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The real estate market was a flurry of activity just months ago, but the sudden “freeze” in home prices and sales has ushered in uncertain times for buyers and investors alike. 

What once seemed like an unstoppable force quickly shifted into a dramatic downturn with major implications still unfolding today.

Last month, Fed Chair Jerome Powell warned that the COVID-19 market was in a precarious “housing bubble.” 

In what may have been an associated effect of lowering inflation rates through hiking their own interest rates, mortgage costs were simultaneously pushed upward. This sharp increase is likely at least partly responsible for creating our current real estate freeze.

The housing crash of the late aughts had more than meets the eye; just subprime mortgages, speculative behavior or excess in real estate projects did not cause it.

Despite the strain on today’s housing market, experts agree that we’re far from replicating the conditions of the last major crash. 

This is a crucial distinction – while there may be similarities, they warn against unnecessarily comparing them and missing out on details that could help protect your investment.

“Your everyday person on the street, when they hear ‘bubble,’ they probably think there is a rising risk that home prices will crash,” Chief Economist Danielle Hale said. 

“There are some warning signs, [a feeling that] something has to adjust.[However,] there are some indications that we’re in a much healthier place than we were in 2008.”

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Is Powell Right? 

If Powell is right, this strange market of ours may be its very own kind of economic bubble. 

Unlike the mid-2000s housing crisis, no oversupply issue can be pinned down. And unlike previous bubbles where homeowners suffered heavily with short sales & foreclosures – not many people will face a similar fate now, mainly because riskier subprime loans have been wiped from circulation, leaving millions safe.

Something out of the ordinary must occur to trigger another collapse – a noteworthy event with powerful implications.

“There’s no formal definition of ‘bubble,’ so people can call it whatever they want,” Bill McBride, an economics blog writer at Calculated Risk who foretold the last housing bubble, said. “The real question is what’s going to happen.”

Financial hardship has become a harsh reality for many as the housing market struggles with soaring mortgage rates. Homebuying is now beyond reach, and demand sharply declines, leaving millions without their dream home and in deep financial distress.

With an ever-lengthening market, savvy sellers must now use increasingly creative strategies to make their homes stand out. Price drops can be expected, and sometimes even expensive concessions are necessary for a successful sale.

“This is not a replay of the Great American Housing Bubble,” real estate and finance professor Susan Wachter of The Wharton School of the University of Pennsylvania said. 

Her insights are invaluable – she’s a co-author of “The Great American Housing Bubble: What Went Wrong and How We Can Protect Ourselves in the Future.”

Wachter added: “Mortgage rates have more than doubled from last March, so it’s not surprising that housing prices in many markets are falling and flatlining across the country.” 

Home Price Rise Market Bubble

During the pandemic, home prices saw a sharp incline that may have struck an unsettling chord among homeowners. An analysis of data reveals that from 2000 to 2005, before the Great Recession hit, the median list price for homes rose approximately $1,243 every month. 

And home list prices are on the rise, with an average increase of $4,410 per month from 2020 to 2022. 

“It was more of a frenzy than a bubble,” Eric Finnigan, vice president of research and demographics at John Burns Real Estate Consulting, stated. “Prices skyrocketed over the last two years, and then spiking mortgage rates were the tipping point.”

Home prices saw an unexpected decline this year, with a total 7.4% drop from June to November as mortgage rates climbed – far steeper than the normal seasonal fall for colder months we usually observe.

Despite the economic turbulence of 2020, home prices remain strong – in November, they were a staggering 11% higher than last year. anticipates that this trend will likely continue for 2023, with an estimated 5.4% increase across the US. 

“The rate at which prices were going up in 2021 and 2022 was unsustainable,” Hale said.

Read also: Housing prices could plunge another 20%, Fed

Is Home Prices Comparable? 

The early 2000s housing market was based on the optimistic concept that prices would soar forever, a notion that proved to be overly ambitious.

People jumped at having their own homes, stretching themselves financially to pursue a dream. But, unfortunately, when home prices began decreasing, they found that refinancing wasn’t enough, and many properties faced foreclosure as reality hit home.

The 2008 housing bubble was a disastrous event for the world’s financial markets, pushing home prices to unbearable lows that didn’t begin rebounding until 2012. 

It took several painful years of economic turmoil before the real estate industry could start recovering from this global crisis.

Economists have determined that the current housing market is quite different from past markets – this time, demand was far outpacing supply, driving up prices. 

Additionally, record low mortgage rates allow buyers to purchase homes they may not otherwise be able to afford due to higher-than-normal sale costs.

“The market is overvalued now. Prices have gotten way ahead of incomes, rents, and construction costs,” Mark Zandi, chief economist at Moody’s Analytics, said. “The market is now correcting. Over time, affordability will be restored, and the market will find its footing.”