2008 All Over Again: An Analysis of Home Prices

Relive the Great Recession, Today!

A Trip Down Memory Lane

The 2008 Financial Crisis (also known as the Great Recession (also known as a really horrible time for the economy, people’s jobs, net worth, and general well being)) hit home prices HARD.

Up until then, people generally didn’t think home prices could ever fall in a dramatic way beyond some seasonal variation. This wasn’t because people were dumb or obviously mistaken in hindsight but rather because home prices tended to grow at a reasonable rate, chugging alongside the underlying economy which, surprise surprise, also tended to grow at a reasonable rate save for some recessionary periods.

The Financial Crisis changed all that because, in the lead up, home prices accelerated well beyond trend in a bubbly fashion and then fell hard as the economy took a massive hit beyond even the most pessimistic expectations. This is all colloquial and you can go read lots of great books on this written by people much smarter than me but that’s the gist. Economy bad. Home prices bad. People and investors? Sad.

Home Prices Rising Beyond Trend? Why Does That Sound Familiar?

The takeaway from the 2008 story is that bad things can happen. Today, home prices are going up like crazy, well beyond trend. Is that justified? Maybe, I don’t know, I’m just some guy - things are complex!

We don’t know what the future will look like but we can use the past as a learning tool to see what would happen if history repeated itself. This is a powerful way to gain contextual understanding of a risky situation.

And, what better situation to use? Let’s take home prices today and apply the worst home-price-decrease episode in modern memory in the exact same way it played out historically:

The first thing to notice here is the forecasted time period. That’s six years. That’s how long it took for the median U.S. home sales price to peak (in 2007Q1) and recover (in 2013Q1). The bottom came in 2009Q1, two years after the peak.

That’s a long time for things to play out! The housing market is not a speedboat, it’s an oil tanker. It takes time for the actions and reactions of buyers and sellers to work their way through the market. So, if you are expecting something to happen quickly to prices today just because they went up fast, it may take a little longer than anticipated.

Rates

Some people say that home buyers don’t shop based on home price but rather on mortgage payment. I don’t know what Zillow filter they use but there is some truth in there.

Many people get as expensive home of a home as they can afford on a monthly basis. And, that monthly payment is dependent on mortgage rates, which have trended down over the last thirty years and would fall again if the 2008 scenario played out in the exact same way:

Remember, this is just a repeat of the 2008 cycle. A new 2008-like home price downturn, even if it happened, may not involve falling rates.

What’s This Gonna Cost Me?

If rates fall (which is a big if given that the current market turmoil is in response to rising rates) then the combined effect with home prices will mean more affordable mortgage payments for buyers:

This is one of the silver linings to a 2008 repeat scenario. Monthly payments for buyers will fall and then stabilize for those looking to purchase a house even after home prices resume their rise.

Really?

These three charts have been presented in a vacuum and replay history exactly. We know that the future won’t be the same as the past.

Look no further than the second chart to question whether or not falling rates make sense in today’s environment. Change that second chart and the third chart changes. Heck, change the first chart! Things won’t be the same.

This Doesn’t Seem So Bad?

One thing these charts don’t show us is the economic impact of the Great Recession. Maybe falling prices seem good if you are looking to buy. They aren’t fun if you own. And, it’s really not fun when you lose your job.

The Great Recession wiped out millions of jobs and caused people to default on their monthly mortgage payments. Families lost homes.

People who wanted to “buy the dip” in home prices may have suddenly found themselves looking for work. Any savings for a down payment not held in cash and in something riskier, like equity, evaporated as markets tanked.

What I’m trying to say is, reality was a lot scarier than some lines on a chart moving down a bit.

Preparing For Whatever Comes

We don’t know what the future holds. But, inevitably, since enough people do try to guess, some will get it sort of right and maybe look smart in hindsight. But, whenever they roll out someone who predicted something, consider what the actual basis for that accolade even is? After all, even a broken clock is right two times a day.

Instead of focusing on guessing the future, focus on building financial robustness. One way to do that is to use scenarios such as the one in this post.

Ask yourself the following: “If I lost my job and the housing market tanked like it did in 2008, where would I be financially?” It probably wouldn’t look good but we can be prepared for something like that by setting aside money just in case. If there is no money to set aside, it’s immediately obvious there is a lack of resilience.

The first step to preparing ourselves to be resilient is to understand what it is we are preparing for. A 2008 repeat is just one of the many many not-so-nice futures we can think of. There are many other possible future paths. And, if we can think of it, we can prepare for it.

Here’s to hoping the happier futures play out for us all : )

Have a question you want to ask or a topic you’d like to see covered? Let me know!