Economists at Bank of America are dispelling fears of a 2008 housing crash. However, they say the current market does have "deja vu" that reminds them of 40 years ago - the 1980s.
Bank of America notes that, unlike in 2008, there is no evidence of a bubble such as overdevelopment by builders and over-leverage by home buyers and owners. Today's housing market is largely dealing with the consequences of tight monetary policy - similar to the 1980s. However, the bank stressed that the housing market still has a bumpy road ahead.
Jeseo Park and Michael Gapen, US economists at Bank of America Securities, wrote in a report: "Looking back at past housing recessions, we believe the 1980s more closely resembled today's market than the 2008 housing crash. However, with interest rates likely to remain high for longer, we are cautious about potential turbulence ahead."
This isn't 2008
In the years leading up to 2008, builders went on a building spree that led to "overdevelopment," they wrote. While residential construction increased last year, it lagged far behind the pace recorded by developers from 2000 to 2006.
In the years leading up to 2008, home loans were also easier to obtain because standards were looser. Lenders do not check income, lend money to risky borrowers and allow purchases without a down payment. They also peddled irresponsible adjustable-rate mortgages.
Home buyers now face higher standards, even during the home-buying boom during the pandemic. That's a big difference, the economists note.
"Household mortgage debt was 65 percent of disposable income in the second quarter of 2009, compared with a peak of 100 percent at the start of the financial crisis," they wrote. The ratio of mortgage debt to real estate assets (i.e., the loan-to-value ratio) was 27% in 2Q23, significantly lower than in 2010."
More like the '80s turmoil'
Bank of America economists believe the housing market is similar to the early 1980s in several key ways. Inflation was also high at the time.
In 1980, U.S. consumer price inflation peaked at about 14% before hawkish policies by then-Fed Chairman Paul Volcker pushed mortgage rates to 18% within a year, curbing inflation but triggering a recession. That has hit the housing market at a time when baby boomers are entering their prime home-buying years.
However, this has not led to a collapse in house prices, which have actually remained stable across the country. When Volcker took over as Fed chairman in August 1979, the median sales price was $64,700. Even after mortgage rates nearly doubled, that figure rose to $69,400 by the second quarter of 1981.
Over the past 18 months, current Fed Chairman Jerome Powell has been following a very similar strategy to Volcker, which is to sharply raise interest rates to curb inflation. The average interest rate on a 30-year fixed mortgage, the most common type of mortgage in the United States, has soared from 3.8% in March 2022 to more than 7.5% today.
That, in turn, has slowed mortgage purchase applications, causing home sales to plunge, as they did in the 1980s, but in an echo of the dynamics of that era, home prices have yet to collapse.
But the impact is already affecting another large group of people entering home buying age: millennials.
"While activity in this prime age group can support home sales to some extent, persistently high mortgage rates should make the decision to buy a home more challenging in the near term," they wrote. Indeed, favourable demographics were not enough to support the market in the 1980s and may not be enough to stimulate it this time."
Us housing outlook
Looking ahead, Bank of America expects limited housing inventory, high home prices and labor shortages to be headwinds for some time. With house price growth still outpacing income growth, affordability remains an issue. According to a Bank of America report, in 2022, the median sales price of a new single-family home was more than five times the median household income.
"We remain cautious about potential turbulence ahead. Only lower interest rates can improve affordability and create a stable and healthy housing market." "The report said.
Bofa expects the Fed to raise rates by 25 basis points in November and start cutting rates in June. By the end of 2024, the bank expects rates to fall by 0.75 percentage point, followed by another full percentage point in 2025.
"Until then, hold on. It could be a bumpy ride." The analysts wrote.