Will Housing Market Downturn Be as Devastating as 2008 Crash?

Warnings of a potential housing market crash have been circulating as the U.S. contends with soaring home prices, elevated mortgage rates and extremely high inflation. But, experts in the housing industry aren't expecting a downturn to be as bad as 2008 crash, calling it a "different animal" entirely.

The warnings have prompted comparisons to 2008, when the market crashed, leading to an economic crisis that became known as the Great Recession. While conditions are similar to 2008, in that a massive increase in demand caused prices to spike, experts believe the market can even out instead of crashing like it did 15 years ago.

Daryl Fairweather, chief economist at the real estate brokerage Redfin, told Newsweek that most recessions see home prices fall by about 2 percent to 4 percent. If a crash were to happen now, she would expect a downturn to be in that range.

"The Great Recession was the exception," Fairweather said. "Home prices fell by like 20 percent, but that's because the recession started with the housing market collapse. It wasn't that the recession caused the housing market collapse, the housing market collapse caused the recession."

Experts Weigh in On Housing Market
Talk and warnings of a potential housing market crash have been circulating recently as the U.S. contends with soaring home prices, elevated mortgage rates and a 40-year inflation high in May. Above, a home is offered for sale on April 26, 2022, in Chicago, Illinois. Scott Olson/Getty Images

In order for the market to crash, the U.S. would have to see a wave of sellers listing their homes. This could happen if there's a really severe recession that meant people couldn't afford their mortgages anymore, Fairweather said.

Unlike in 2008, when homeowners had high interest rates they couldn't afford, many homeowners obtained "really cheap mortgages" last year at around 3 percent, according to Fairweather. So they should still be able to afford their payments. Homeowners also gained "record equity" last year, meaning they're far less likely to be in danger of going underwater on their homes.

In 2008, adjustable rate mortgages (ARMs) were among the causes of the housing market crash, according to the Center for American Progress.

ARMs are riskier than fixed-rate mortgages because even though they start at a lower interest rate, that rate can change, according to a handbook from the Federal Reserve Board. If the rate goes up, homeowners with ARMs could be forced to make much higher monthly payments than they started with.

When the market crashed in 2008, ARMs accounted for a much higher percentage of all active mortgages than they do now. Currently, ARMs represent 8 percent of all mortgages, but just before the market crashed in 2007, they accounted for 36 percent, NBC reported.

In addition to fewer of today's active mortgages having an adjustable rate, more than 80 percent of ARMs today are under a fixed rate for the first seven to 10 years that they are in place.

Jerry Howard, CEO of the National Association of Home Builders, offered a similar analysis as Fairweather. He does not believe house values will plummet, or that the entire financial system will melt down.

"You'll see a slowdown, and with that will probably come a certain amount of price decline," he said. Price declines could be "offset" by increased costs of capital, he added. "It's going to be a different animal than what we went through in 2008."

According to Federal Reserve History, a project that compiles the history of the central banking system, the housing sector "led not only the financial crisis, but also the downturn in broader economic activity." Current fears that the housing bubble could burst have been accompanied by concerns of a recession, with some experts warning that the U.S. is headed for or already in one.

A housing bubble usually begins with a boost in housing demand that coincides with limited inventory, which can cause housing prices to spike, according to financial website Investopedia. The bubble can burst when demand falls or stagnates, even as supply continues to go up because of the earlier jump in demand. This can result in home prices dropping when the new supply of homes lacks buyers willing or able to pay the elevated costs.

America's facing a significant housing shortage, with conservative estimates putting the shortage around 1 million units while other estimates believe it's closer to 3 million.

Kelly Mangold, a principal at RCLCO Real Estate Consulting, told Newsweek conditions are significantly different than they were in 2008 and America's been building homes at a "much slower rate" than demand even since the crash.

"Definitely over the last period of the pandemic, what we've seen is that there's been a scarcity of homes on the market," Mangold said. "We saw that prices were getting higher and higher because interest rates were so low at that point, and people were just basically bidding up a scarcity."

Competition for houses has cooled a bit since interest rates started to rise and Mangold said there's still a demand for homes, but far fewer bidding wars because increased interest rates caused affordability problems for some buyers.

People who can still afford homes at their price point still have opportunities to buy, but others might have to adjust their wish lists. Builders and developers are already starting to adjust their visions to match market conditions by putting homes on the market that are slightly smaller or more attainable price-wise.

"I think there's going to be some adjustments like that," Mangold said. "I don't foresee a big housing market crash unless we have some surprising things happen that we don't see happening now."

Neil Shearing, chief economist for the economic research consultancy Capital Economics, told MarketWatch that the U.S. should expect to see a drop in housing prices like it did about 15 years ago. This is because surging mortgage debt drove the previous downturn, but "the latest surge in house prices has been underpinned by the extremely low level of nominal [and real] interest rates," Shearing said.

In May, mortgage delinquency rates fell to a record low, 2.75 percent, for the third month in a row, according to the financial services company Black Knight, indicating that the mortgage debt Shearing said pushed the 2008 crisis might not be as much of an issue now.

Data from the Federal Reserve Board shows that delinquency rates for single-family residential mortgages began a sharp increase in 2007 before the crash and then peaked at 11.36 percent in 2010.

William Wheaton, a professor in the Massachusetts Institute of Technology's Department of Economics and former director of the MIT Center for Real Estate, agreed that a market drop now would not be anything like 2008.

"I think it will simply slow down in appreciation and prices might flatten out, but I don't really see anything like 2008 happening," he said. "There's no real crisis. It's just, credit is more expensive. Of course, it was really, really cheap for the last three years, unusually cheap."