There has been a lot of concern that we are headed for a housing market crash. We have an affordability crisis. A lot of the homebuyers cannot afford homes anywhere. Recession is looming around and one of the most common questions we get is how bad is the recession going to be. All those questions are quite understandable. I’m going to talk about why the housing market crash if we have 1, may be mild and not as big as the 2008 housing crash. So let’s see the numbers. I have three or four numbers we can look at that explains why the housing crash, if there is, is not going to be as significant as the one in 2008, which we all know was a pretty significant one. And those wounds are still with us. Rest assured, if we do have a housing crash, it is not a repeat of 2008.

So there are four factors I’m going to talk about why the housing crash is not as significant as 2008, or even if there is one, it’ll be very mild because the numbers show different signs of a housing crash. In fact, from what I’ve read and all these bidding wars going on today, May 2023, hundreds of people coming to open houses, with multiple bids, and hardly any homes to show. So we don’t even see signs of housing price declines, let alone a housing crash. So what are the numbers? Let’s look at the number one factor of the four factors I’m going to talk about. The first factor, why this is different from the 2008 crash is that it is very hard to get a loan in today’s market compared to what happened in the 2008 recession and the few years before that.

Anybody could get a loan. If you had a driver’s license, if you had a Social Security card, and a job that you can prove verbally or nonverbally, you are able to get a loan. Not today. The banks and lenders learned from their mistakes and from the recession. So they have raised the standards very high since the last four or five years and even previously to that, the lending standards have gone up really high even today. If you apply for a loan, they check everything. They want to make sure that you are going to be able to pay back the loan in a timely fashion without giving them any hassle, without going to foreclosure. So one of the reasons why this may be a milder recession or a milder housing crash is because the loans that were given and the loans that are given today are pretty good loans. They are not wishy-washy loans like they were in 2008.

I remember when I was a listing agent, some of the buyers that came in with the buyer’s agent and the lenders, were getting approved for a loan at a 1% interest rate on a 30-year loan and they were qualified at 1%. So if you got a loan at 5% today versus 1%, anybody would qualify. But the bad thing was these 1% loans were variable loans. They switched over in one year to five or 6%. So obviously the guy’s payment or the buyer’s payment at 1% if it was $2,000. And he qualified because he was desperate to buy a house because everybody was buying houses just like they were buying ice cream. But after a year they got a shock. The $2,000 payment jumped to $7000, $8000, and $9000. It was ridiculous. That’s why we had a foreclosure. One of the reasons, and this is one example so if you look at the MCAI standards today, which stands for Mortgage Credit Availability Index, the higher the MCAI index, the easier to get a loan. So the buyers who bought the homes are very strong buyers and they’re going to hang on to their house and not give it away to the banks easily like they did in the 2008 Recession.

The second reason why this is a milder crash than in 2008 is that the unemployment recovered faster this time than in 2008. If you recall, and if you see the chart below, it shows the length of crisis different than last time. If you can see the blue lines, as of January 2020, the unemployment was 3.5% and by 2022it dropped to 3.5% from a high of 14%. Of course, this was due to the pandemic and they injected a lot of money into the economy. So the unemployment in 2020 went from 3.5% to 14% a month later, six months later, but then it dropped to 3.5%, a significant drop very rapidly. So a lot of people got their jobs back. But if you go back to the recession, if you notice the average, the unemployment ran from 6% to almost 10%, hung around at 10%, and came down slowly. Took about six years to come back down to 6%.So during that period, not only there was people out of cash, but they lost jobs. It took a long time to find jobs, and this time it’s different. So people are getting jobs and they are being able to make payments, whereas in 2008 they were not able to make those payments. So that makes a big difference in the way the recession was in the housing crisis was in 2008 compared to 2023 if we are going to have one.

So the third reason why there may be a mild housing crash or no housing crash is because there is a huge shortage of inventory. As you know, in 2008, there were lots of homes for sale. Homes took ten months to sell. In other words, the housing inventory. We had a ten-month supply. As of May 2023, we have an inventory of about 2.6% nationwide. Which means that if no other homes came on the market, it would take all the homes to sell out in 2.6 months, which is very, very low. A norm is about 90 days, which is about three to four months. But in 2007, 2008, and 2009, we had almost ten months of supply. At the same time, people did not have money or could not qualify after they lost their jobs or could not find any jobs. So a ten-month supply versus a two-month supply is a big difference. So, as you know, supply and demand, the more homes for sale, or the more items for sale, the cheaper they get. The less homes for sale, the less items for sale, the more expensive they get.

People ask us all the time, why are prices not dropping? How can people afford to buy homes? Well, the reason is because there’s a shortage of homes. People do want to buy homes, and because of the short supply, there are multiple offers. Just this morning, I’m working with an investor friend of mine, and there was a commercial property for sale. It was listed for $1,500,000. And when I did the analysis, before I sent the property to my investor friend, I realized that the property was priced less than the market value. I believe the market value is $1,600,000 because I’m very familiar with that neighborhood in the city of Anaheim. So I sent him the information that, hey, here’s a property for sale, the kind of property you are looking for. And within five minutes, they called me back and said, let’s write up an offer for $1,500,000. This guy is a friend of mine, so I can tell him. So I call him up and said, Nope, I’m not going to write an offer for $1,400,000. I will write it at $1,500,000 or maybe $1,550,000. And he started arguing with me in a nice way. So I told him that, hey, if you offer $1,400,000, I can assure you, because I also happen to know the listing agent or the seller’s agent, you will not get an offer number one, or you will not get a counter offer number two. I also knew that there are going to be multiple offers on this commercial property. I expect at least three or four or five offers based on the price and the location. So I told my friend, investor friend, that if you are serious, you have to come in at $1,500,000, maybe even more. So that at least if the seller’s agent counters to others, you will be counted as well. Your offer will not be rejected. Same thing is happening with homes.

If the homes are priced right and if there’s multiple offers coming in and there’s hundreds of people coming to the open house. Why would you write an offer under the market value you have to go over? It’s a question of supply and demand. Right now there’s a shortage of supply. The housing supply shortage is going to remain for the next one or two or three or four years. A lot of homes are not being built fast enough. There’s huge buyer demand. Rents are very high. So the people who are paying higher rents want to move into a home because might as well pay a $5,000 mortgage instead of a $5,000 rent payment or pay $2,000 mortgage instead of a $2,000 rent. So there’s still a demand for homes to buy and yet there’s a shortage of supply. And This will cause the prices to remain at least the same, if not drop significantly. In fact, there was a survey done last month. They took a survey of about 100 experts in real estate and they feel that the home prices may go up in 2024, 2025, and 2026. So we’re not seeing a price line based on these numbers.

The fourth and most important reason why the housing market is not about to crash is that there is a high amount of equity in all the homes. We have equity in record levels these days. As you are aware, all the people who bought homes 10-15 years ago, their homes might have doubled in the last five or six years as far as the home prices go. So all that is equity. Also, for the people who bought in the last four or five years, even two years ago the market has gone up 10% to 30% per year, depending on your local market. So even if somebody bought a home just five years ago, the value of the property I’m sure, is up 2030 40%. Of course, there are some pockets that may not have that high of equity, but there’s a high record of equity. In fact, in a lot of places home values have doubled, which means the equity has doubled. And how does equity play a role in a recession or a foreclosure? Well, let’s say I lost my job or my spouse lost a job, and we both cannot afford to make payments. So even if I stop making payments for six months to a year and the bank forecloses on my property, well, they can foreclose because even if I’m behind on a one-year payment.

And let’s say I bought the house for $700,000 10 years ago, now it’s worth a million dollars, at least in my area in Orange County. As an example, if I lost a job, did not make any payments for a year, and the bank is trying to foreclose on my property, well, they won’t be able to foreclose because I can still sell the property. Maybe I cannot sell it for a million dollars. But if I have a $700,000 loan and my house is worth a million dollars, and I’m behind $100,000 n payments with penalties, and if I put it up for sale before it forecloses. And even if I sell for $800,000 on auction, foreclosure, or auction, I still have $100,000 equity. So even with a loss of jobs, loss of payments, and decline in the market price of my house, I would still have equity, at least in today’s market as of May 2023. So that’s how important equity plays a role in this market. Of course, as we talk about right now, as of May 2023, consumers have been borrowing more and more. As of December or fall of 2022, more credit card debt is coming along.

The economy has slowed down. Credit card payments are rising. People are borrowing more. Even then, there is still a lot of equity in the houses. So if you look at these four factors, if we have any kind of crash, it’s going to be a soft crash.