What happened in 2008?

The Great Recession or Global financial crisis (GFC) or simply, the Financial crisis of 07 and 08 crushed the economies
globally. Fueled with low interest rates and increase in the risk appetite of banks have caused the financial institutions
and federal agencies to go belly up! The crisis reached seismic proportions in 2008 with the bankruptcy of Lehman
Brothers and insurance giant American International Group (AIG).

All this was started in early 2000s when the housing market was booming. Wall street was in thirst of making money
and increase in demand for an expanding residential securities market has made US housing market to launch into
uncharted territory. With the increase in greed and unacceptable regulatory restrictions, nearly $11 trillion in
household wealth has vanished which includes retirement accounts and life savings.

Subprime mortgages! To fill the gaps for the increasing demand in the housing market, banks have lowered their
standards. Any homebuyer in USA could get these “Subprime mortgage loans” with little to no qualification. With very
low interest rates and almost ‘zero’ qualification has caused the homebuyer to exploit the opportunity for so called
‘American Dream’. The national ethos of the United states has propelled the avoidable crisis. As mentioned in the
federal reserve report, the crisis was the result of human action and inaction, not of Mother Nature or computed
models gone haywire. To paraphrase Shakespeare, the fault lies not in the stars, but in us!

With the low interest rates and increase in demand for housing market caused the housing prices to rise which in
return, caused the explosion in risky subprime lending. Due to egregious and predatory lending practices (which
created moral hazard due to the implicit guarantee by the US federal Govt.) and dramatic increase in trading of
unregulated derivatives such as synthetic securities have magnified the losses.

What is happening in 2020-21?

The crash of the economy globally in 2020 is neither due to the risky lending nor due to unethical practices in the
financial market but it is, as mentioned above, due to the result of human action and inaction, not of Mother Nature
(yet to be proved). Currently, the qualifications for getting a home loan are far more comprehensive than they were
in the 2000-2008 period. The guidelines, documentation and approval process are firmer and tighter than it was
earlier.

Covid-19 has crippled the economies but the housing market, what it seems to be, unaffected. Not at least at the rate
of the how the overall economy crashed. Currently, on the economic front, a temporary decrease in the housing
market is noted due to lockdowns but statistically, the home prices are hot!

There are 5 factors from different sources supports the statement ‘Why there is no crash in the housing market in
2020’

1. Home Price growth (FHFA): The cumulative increase in the house price market is comparatively lower than
what it has in early 2000s i.e., 18% increase in 2020 vs 48% in 2006
2. Housing supply (Census): Currently, there were less construction permits issued than they were in 2006.
3. Homes for sale (NAR): As per Morgan Stanley housing tracker, 3.7 million homes were available in 2006
compared to 1.5 million currently which creates a constricted market.
4. Disposable income Vs House prices: There is lot of difference between Disposable income and home prices
which gives an edge not push the housing market haywire.
5. House Indebtedness: The positive spread between the loans taken by the homebuyers in 2007 and 2020 is
huge which indicated that households in 2020 have less debt on their homes when compared to 2006

What’s the future of the US housing market?

As per the various statistics posted by the statistics office of USA, demand is so fierce that almost half of US homes are
selling with a week or so. Due to end of lockdown, demand for new listings is raising. In fact, annual price growth
reached 17% in March 2021. This boom is fueled again with the low interest rates and demand for bigger homes in a
so called remote-work world. Demand for homes boosted in suburbs due to the indication of long-term job flexibility
(WFH) by many companies and as noted in the point #4, the supply of homes is shrinking fast since builders can’t build
fast enough to cater the demand. For now, the demand is surging practically everywhere. As per average U.S sale-to-
list prices, the average US homes is selling far above its list price.