Today's housing market conditions are truly unique and have never been seen before. The genesis of this housing cycle came about as a result of the 2008 Great Financial Crisis (GCF). The GFC and related housing crash caused a contraction in the broader housing industry and those effects are still with us today.  

At that time, homeownership rates for American families were at 69%, the highest they have even been, and the annual residential resales were nearly 7 million units. This is compared to today's rates of 64% and 5 million respectively. As we can see by these numbers, this housing cycle is far off that of the GFC. 

The story of today's market is about inventory and demographics. One of the major ripples from the GFC is that home building production and builders were each negatively impacted. The production of new residential housing units has escalated by 40% over the last 10 years, while the population continues to grow. This has been exacerbated by a cumbersome and expensive approval process at the state and local levels for new homesites and other forms of housing.    

Two demographic trends  are also putting significant pressure on the existing housing supply. First, 62 million millennials have come of age and are entering the housing market in large numbers. The notion that was held several years ago that millennials would not be homeowners (which always seemed surprisingly naïve) has proven to be grossly incorrect. As they are entering the family formation stage of their lives, they want the same sense of home for their children as they had growing up and this generation has proven to be more financially stable from a younger age than previous generations 

The second trend is the 55 million Baby Boomers who are living healthier and longer lives, therefore are staying in the housing market beyond expectations and in many cases remaining in their family home. What might be a starter home for a millennial could be a retirement home for a Baby Boomer. In many cases, both groups are competing for the same limited supply of inventory.   

Is This a Housing Bubble Like '08? 

The short answer is no. As previously mentioned, the dynamics of this market are entirely different than those of any other time. It is the quintessence of a classic supply and demand relationship. In fact, this is textbook Economics 101 where there are more consumers than available product. 

There are also significant fundamental factors in today's housing cycle as compared to those that triggered the GFC 14 years ago.   

Here is a comparison:  

• Required credit scores for today's buyers are significantly higher. 
• General mortgage underwriting standards are far more stringent today.  
• There was an oversupply of housing in 2008, not so in today's market. 
• Speculation was rampant in 2008, very little speculation today. 
• Exotic mortgage programs with low first year teaser rates, subprime underwriting, interest only loans and so on, were common to attract the less qualified borrower to the market.  By and large those programs are not prevalent today. 
• Household and corporate balance sheets today are at their highest levels in recent memory. 
• Home equity loan usage is very low today compared to the GFC period. 

What's Next for Housing? 

Because of the inventory and demographic factors, we have discussed that the seeds were sown for this tight housing market, regardless of the Pandemic. The Pandemic certainly heightened the inventory tension, but on its own the Pandemic didn't create the market. 

Issues such as demographics and inventory shortages are long term in their development, therefore long term in their solutioning. These conditions will remain in place for many years. At the current rate of new construction home starts and given the numerous demographic cohorts interacting with housing, the market could upwards to a decade behind in supplying adequate inventory.   

It is certainly not hard to reason that consecutive years at 20% appreciation is not sustainable.  What we are seeing in the second half of 2022 is a slow down to more sustainable levels of activities so consumers and prices can both catch their breath. More reasonable annual appreciation rates in the range of 7-12% which are strong historically, are likely in the years to come as the market ebbs and flows in concert with other economic influences. Although interest rates have recently increased, they are well within historically low levels as well. A negative equity scenario would be hard to imagine given the long-term prospects of an imbalance in the supply to demand relationship.