One of the biggest surprises of 2020 – a year riddled with the impact of a global health crisis – is that real estate had one of its best years ever.
Home sales and prices were up substantially in 2020 over the previous year. At this hour, there are those fearful that the current market’s exuberance mirrors that of the last housing boom and as a result, we could be headed for another crash.
However, there are many reasons this real estate market is nothing like 2008. The following commentaries offer three visuals to show the dramatic differences.
Mortgage standards are nothing like they were back then.
During the housing bubble, it was difficult not to get a mortgage. Today, lenders use a Housing Credit Availability Index (HCAI) to determine risk levels in offering loans. During the housing boom of 2004-2006, lenders were comfortable taking on high levels of risk to loan money and today, the HCAI is the lowest it has ever been.
Home prices are not soaring out of control.
Below is a graph showing annual home price appreciation over the past four years compared to the four years leading up to the height of the housing bubble. Though price appreciation was quite strong last year, it’s nowhere near the rise in prices that preceded the crash.
There is currently a shortage of homes on the market, not a surplus.
The months’ supply of inventory needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance, and will causes prices to depreciate. Anything less than that level is a shortage, and will lead to continued appreciation.
As shown below, there were too many homes for sale in 2007, which caused prices to tumble. Conversely, there is now a shortage of inventory, which is causing acceleration in home values.