OCTOBER 2024BUSINESSMANAGEMENTREVIEW.COM8IN MY OPINIONAs the current housing market continues to experience rapid appreciation for several straight years, even in spite of rising rates, is the market poised to collapse as it did during the Financial Crisis? Have the lessons from the Great Recession been addressed, or are we doomed to repeat history?To answer these important questions, let's first look at the fundamental flaws of the last housing recession. The U.S. housing market in 2008 was a tale of two sides. On the one hand, it was booming, with home prices soaring to new heights, a market brimming with confidence. Yet, on the other hand, there were increasing foreclosures and defaults due to borrowers being coerced into risky loan products, being approved for loans that they could not qualify for, and a capital markets liquidity system that did not identify any of the risks appropriately. It truly was a house of cards that came crashing down the moment delinquencies began to rise, and the rest was history.IN THE WAKE OF THE COLLAPSESince the crash of 2008, there have been several changes to homebuying that are worth noting that have helped ensure a crisis of this magnitude could never happen again. Regulatory changes were enacted that required lenders to properly document and qualify borrowers to afford the mortgage they applied for. Part of those qualification standards was ensuring there is proper documentation of income and assets, along with adding layers of risk protection for loans with fluctuations in interest rates and payment changes. Additionally, loan officer compensation was completely overhauled to address the steering of borrowers to loan products that were not in their best interests. Additionally, mortgage regulations have also changed drastically since 2008, further strengthening the quality of originations. These regulations include a cap on how much originators can charge for closing costs and origination fees, as well as limits on prepayment penalties and points lenders assess when issuing mortgages.Lastly, on the capital markets side, where loans are bought and sold, there have been drastic changes. Those changes include the risk modeling changes by the rating agencies that more accurately assess risk and the securitization standards adopted by the mortgage industry to provide much greater protections to investors.There are also unintended changes that helped put the housing market on a more solid footing. Quantitative Easing by the Federal Reserve lowered long-term fixed mortgage rates that helped steer borrowers away from riskier adjustable-rate products.These massive changes show how much progress has been made since 2008 towards preventing another housing crisis while still providing accessibility for those looking for new homes or investment opportunities in real estate markets across the country.DOES HISTORY REPEAT ITSELF?People always try to correlate the two time periods because the recent rise in real estate prices is eerily similar to the runup prior to 2008, but the two markets are nothing alike. The events that happened in 2008, including the lending practices and the supplies that existed, are no longer happening today. How the industry manages and documents loans now is very different. The recent runup in housing prices is a combination of a lot of factors, none of which are similar to the market before 2008. To start with, housing inventory today is at a much lower level than before the Financial Crisis. What has plagued the market today is a total lack of supply to meet demand. The stoppage of homebuilding during the pandemic By Jason Obradovich, Chief Investment Officer, New American FundingCOMPARING THE HOUSING MARKET IN 2008 VS. TODAY - ARE HOME PRICES ABOUT TO COLLAPSE?Jason Obradovich
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