Collins: How is today’s housing market different than 2008?

As the Federal Reserve raises interest rates in an attempt to reduce inflation, there is growing uncertainty in the economy. Some are worried about the increasing interest rate’s impact on “kitchen table issues” such as credit card bills and utilities.  However, this anticipated economic downturn looks different from the last major economic decline of 2008.

While there are several indicators this projected economic downturn might not be as severe as the Great Recession of 2008, one major indicator is the significant difference in the strength and resilience of the U.S. housing market. In a column I wrote a few months ago, I touched on some of these factors, and they are still relevant.

Lawrence Yun, chief economist at the National Association of Realtors, delves deeper into the differences between what happened to the housing market during the Great Recession of 2008 and what is happening today. Whereas short sales and foreclosures were rampant back then, Yun says the current housing inventory is about a quarter of what it was in 2008.

“Distressed property sales are almost nonexistent, at just 2%, and nowhere near the 30% mark seen during the housing crash,” Yun said. “Short sales are almost impossible because of the significant price appreciation of the last two years.”

These differences lead Yun to believe U.S. home prices will not experience a major decline in 2023 if mortgage rates remain at about 7%. His thinking is that with high inflation, elevated mortgage rates and slowing home sales, the housing inventory will be “severely limited,” effectively preventing large drops in the price of homes. Essentially, the low turnover of homes will keep the values stable.

While this is good news for existing homeowners, prospective buyers might have a tougher time breaking into the market. Nonetheless, we are seeing some positive trends.

First-time homebuyers comprised 29% of sales in September, holding steady from the August numbers and slightly higher than 28% from September of last year. The National Association of Realtors 2021 Profile of Home Buyers and Sellers found that the annual share of first-time homebuyers was 34%. This year, the average age of a first-time homebuyer is 33 years old.

For first-time homebuyers, often the largest hurdle is saving up for the initial down payment to purchase their first property. The Santa Clara County Association of Realtors (SCCAOR) and other organizations have down payment assistance programs that can help these first-time homebuyers.

For example, the Santa Clara County Realtors Foundation, the charitable arm of SCCAOR, recently launched the Down Payment Assistance Program to help Santa Clara County first-time homebuyers in attaining homeownership. The fund will benefit Santa Clara County homebuyers with an Area Median Income of no more than 100%. The awarded funds are in the form of a grant, therefore repayment is not required.

Furthermore, programs like Empower Homebuyers SCC use 2016’s Santa Clara County Measure A money for funding. These programs can be used in conjunction with one another to help first-time homebuyers close on their first real estate transaction.

Rather than paying rent every month, these first-time homebuyers are able to ensure greater financial freedom by building equity in their homes. However, oftentimes in Santa Clara County, first-time homebuyers have a difficult time collecting the initial down payment amount. SCCAOR’s Foundation and similar organizations hope to help close this gap and improve the ability of those that are renting or living with family to purchase that first home.

Homeownership, especially for younger people and first-time homebuyers, creates the opportunity to grow wealth and build equity for the future. The appreciation and equity of those homes mean that homeowners will be on much firmer financial footing. This wealth and equity will make this possible economic downturn different for Santa Clara County. There may still be a downturn, but for our county, the severity and length might be less than the rest of the country.

San José Spotlight columnist Neil Collins is CEO of the Santa Clara County Association of Realtors, a trade association representing more than 6,000 real estate professionals in Santa Clara County and surrounding areas. His column appears every fourth Thursday of the month. Contact Neil at [email protected] or follow @neilvcollins on Twitter.