It’s Deja Vu in the Housing Market—Is It 2006 All Over Again?

What’s up everyone?

Does this sound disturbingly familiar? 

After a few years of home prices skyrocketingbidding wars on every home, and the housing market exploding,   home prices have very suddenly started to level off. The number of home sales are way down and talk of a recession is everywhere. 

Is it 2006—the year that saw the ramp-up to America’s housing crash two years later—all over again?

Just like in the mid 2000s, many of the industry experts are saying that we are experiencing a correction and not a crash. Mind you, back in 2006, experts were saying the same.

But back then, they were very very wrong. The housing bubble burst, we entered the Great Recession, and it took many years before the economy and the housing market recovered.

So, are we in for a repeat performance? Is the housing market going to crash and burn?

Today we’ll take a look at an article by titled It’s Deja Vu in the Housing Market—Is It 2006 All Over Again? And see what they are saying.

Let’s dive right in

Are we really in a similar situation than we were back in 2006? 

Yelena Maleyev, an economist at KPMG said, “Parallels can be drawn because of how quickly home prices have risen over the past few years, but that’s where the comparisons would end.”

Let’s look at the differences between then and today and see if she is right:

Back then the housing market took a nose dive because homebuyers could no longer afford their mortgages because they were under qualified– or they couldn’t afford to pay once their payments increased past the interest only phase.

Today, even though mortgage payments are nearly double what they were pre pandemic due to higher interest rates, buyers can afford the house they are buying. 

They have been vetted more carefully and there are much stronger loan requirements in place, so if they get approved for a loan, they are able to pay the mortgage.

Clare Trapasso writes that the most important difference between then and now is there are many more buyers than there are homes available this time around. The acute housing shortage will likely keep prices from falling off a cliff.

During the Great Recession, there were plenty of available homes—and no one to purchase them—so prices dropped about 26% over five years for existing homes. 

Today, buyers are still willing to bid over the asking price for move-in ready homes in desirable neighborhoods despite the financial challenges they face.

“There are a lot of similarities that we should not ignore just because this time is different. … We do have some of our fundamentals that are out of whack,” says Ali Wolf, chief economist of the building consultancy Zonda. “But I don’t think it’s going to be a crash because the undersupply of homes is so different.”

Lisa Sturtevant, the chief economist of Bright MLS reports that Even with the affordability challenges, more than half of the sellers in the mid-Atlantic region received multiple offers in March. And about a third of all of the home sales went for more than the list price.

I work in the mid Atlantic region and I can confirm what she is saying is true. Here in the DC area, every good house (and when I say good house I mean those houses that show well and are priced right ) is going in multiple offers and escalating above the asking price. 

The only difference I’m seeing between now and a year ago (besides money being more expensive), is that if a seller overprices a house, or it doesn’t show well, buyers are passing on it. If they’re going to pay more, the house has to be worth it. 

Back a year ago and the year before that, it seemed as if any house on the market would sell, it was just a matter of for how much.

I know that out west, prices have come down a lot in those markets that went up the fastest during the boom like Boise, Austin and Phoenix. But even those markets are starting to heat up again. 

“We should expect some price corrections, not a price crash in these places where prices ran up the fastest,” says Sturtevant. “Everything seems to be slowing down a little bit … but everything still seems very competitive.”

Without more inventory, I cant see how the market will balance out. There are just not enough homes for sale. 

Most sellers are also buyers, and they don’t want to trade in their low mortgage rate for today’s higher one. 

So where will the inventory come from? 

Some people have suggested we will start to see more foreclosures come on the market like back in 2008.

Foreclosures have been steadily increasing as the pandemic-era moratoriums expired. 

But another tidal wave of foreclosures, like what happened during the crashisn’t likely.

In the 2000s, “we had a huge amount of people using adjustable-rate mortgages with remarkably low interest rates. And there were also people who quite frankly should not have gotten a mortgage,” says Matthew Gardner, chief economist at Windermere Real Estate. But when mortgage rates rose, “people found their mortgage payments doubling overnight and they had next to no equity. So what did they do? They walked away.”’

About 40% of homeowners currently own their homes outright without a mortgage, according to KPMG’s Maleyev. 

And many homeowners have a lot of equity in their properties due to rising home prices over the past few years. So if they were having trouble making their mortgage payments, they could simply choose to sell their homes instead—and often walk away with a profit rather than get foreclosed on. 

Also,  most homeowners who have mortgages have 30-year fixed-rate loans, which don’t balloon in size over time.

One variable that could shake the housing market is if we do enter into a recession and people start losing their jobs.  This could cause homeowners to be forced to sell their homes if they can no longer afford them which would increase inventory. 

It would also cause people to pause before buying a home if they feel like their job is unstable. 

“We will likely see some effects on the housing market going forward,” says Bachman, of John Burns. “Any time you lose jobs, there’s less demand for housing, for sale and for rent.”

Even with the possibility of a recession, most industry experts don’t expect another housing market CRASH like back in 2008. This time it’s too manufactured – with the Fed reserve holding the puppet strings.

They will continue to fight inflation by raising rates and once inflation is under control, they will cut rates to create stability in the economy. 

This will most likely cause mortgage rates to go down which will stimulate the housing market. According to Trapasso, 

Many economists believe the housing market will begin recovering as early as next year, if not the year after that.

“It’s not the calm before the storm,” says Gardner. “This was just an important reset in the housing market.”

Let’s take a look at Redfin’s latest housing market update to see what the data is saying about our housing market right now and the trends moving forward.

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