Why 2023 is not like 2008.

There's No Crash Coming.

With all of the challenges that our local real estate market is facing, it would be very easy and perhaps even logical to draw parallels between today's real estate market and the market in 2007 which lead us to the Great Recession in 2008. After all, I even told you in this post that total revenue in San Carlos is down from last year by nearly 30%, and the average price of a single-family home dropped 20%. Those numbers aren't that are off what happened between 2008 and 2010.

Kinda sounds like a crash is coming, right?

There's not, simply because the market conditions couldn't be any different between these two times in history. But before I dive into the reasons why, it's important to remember what the garbage pile looked like in the wake of the economic bubble when it burst in 2008: There were LOTS of short sales and foreclosures, and that type of tainted inventory did more to bring the market to its knees than anything else. Despite the rapid slowing of the market that we've seen and the precipitous drop in sale revenues, you're just not going to see the market crater like it did then. Here's why:

• Record Equity: “Equity” is defined as the the difference between what a home is worth on the open market minus what is owed on the home. Short sales are those sales that are attempted when the value of the home has fallen below the amount that is still owed on the property, or in other words, there's negative equity. Back in 2010, which many consider to be the bottom of the Recession, the total home equity in the United States stood at $8.77 trillion. That's still a lot of peanuts. But in June of 2022, the total residential equity hit a record high of $29.3 trillion. While that number has likely dropped a bit this year, the average equity for any home with a mortgage in 2023 still stands at approximately $274,000. That's a nationwide average, and I'd be willing to bet that figure is far higher on the Peninsula.
• More Homes Without Mortgages: As you'll see in the graph below, 39% of all homes in the United States are owned outright — i.e. no mortgage. Another 29% of all homes have greater than 50% equity. When you roll that together, nearly 68% of all homes in the United States have greater than 50% equity. Remember, a home with no mortgage can't be foreclosed upon, and a home with positive equity is not a short sale, no matter how distressed the seller may be. That's a huge difference from 2008.
• Lending Requirements Have Tightened. A big reason why the market crashed so heavily in 2008 is that people who had no business buying homes were doing just that. Predatory lending was the theme of the day, and interest-only loans were being handed out like candy to sub-prime borrowers who in turn fueled a white-hot spike in the market. Just watch the movie “The Big Short” if you want to live that moment in time again. Today, lending requirements have tightened — almost too much, if you ask anyone who has tried to qualify for a mortgage today. But the takeaway from this is that there are no more garbage loans like there were in 2008 which fueled the meltdown of the economy
• Extremely Low Inventory: When the bottom fell out in 2008, the market was flooded with inventory — more bad than good. The bad inventory were short sales and REO's after banks repossessed homes that people stopped paying on. That kept prices depressed until that inventory was slowly absorbed. The market today is totally different. Communities across the country are reporting record low inventories, which is keeping the home values stable. Even if we get a 20% increase in inventory, it's still not enough to satisfy the demand for buyers currently looking in this market.

The Bottom Line

There are definitely challenges that we are all facing in this current economy. Jobs are being cut by the thousands, and the price of everything is going up. But the hallmarks of the Great Recession — short sales and foreclosures — aren't going to be there this time around.

If a homeowner has lost their job and cannot keep up with the mortgage payments, there's a better chance now more than ever that they can still sell their home without experiencing the nightmare experience of a short sale or worse yet, a foreclosure. It's still a horrible outcome to be forced to sell, but homeowners are in a far better position to walk away free and clear than they were back in 2008.

As I stated above, with more people owning their homes outright or with extremely high levels of equity, you're just not going to see short sales and foreclosures like we did in 2008. You can't foreclose a home that doesn't have a mortgage, and you can't short-sell a home with positive equity.

I hope that helps some of you sleep a little better. We are in a tough time right now, but we're definitely not going back to 2008.