Key Differences Between Housing Market Now and 2008 Crash

Elevated mortgage rates, high inflation and soaring housing prices in recent years have sparked discussions on whether the housing market might be heading for a crash.

Some experts have asserted that a crash is coming, while others believe that the market is undergoing a correction, a less severe type of downturn.

But there are some fundamental differences between the current market and the market before the 2008 housing crisis, even though both periods saw accelerated home price growth.

One of the key differences is centered on underwriting standards. Ryan O'Loughlin, a senior director in Fitch Ratings' residential mortgage-backed securities (RMBS) group, told Newsweek that there is now better verification of income and assets.

"During the crisis, there was minimal verification of a borrower's income which led to the prevalence of stated income loans," O'Loughlin said.

This means that some borrowers, and in some cases the actual loan originators, were stating that they had a certain income in order to qualify for a loan when in reality their income was much lower. When it came time to make payments, borrowers whose income did not support the payments encountered trouble.

"In today's environment, the verification of the actual income and assets is much more rigorous and has to maintain certain thresholds," O'Loughlin said.

What are known as "teaser rates" were also prevalent during the 2008 crisis.

"During the GFC [Great Financial Crisis], borrowers typically had a much lower payment for the first number of pay periods and then had the payment reset to a higher value. This could have been done through interest-only features or artificially low initial interest rates," O'Loughlin said.

Once the payments were reset to the higher level, borrowers again "ran into trouble" since they were not able to make the payments, he added.

Another major difference is that there is now a "record amount" of equity in the U.S. housing market due to the considerable home price gains.

"The amount of borrower equity during the GFC was substantially less than today and when borrowers defaulted there were forced sales and massive losses," O'Loughlin said. "If a borrower ran into trouble today, there are a lot more options to avoid losses due to the equity in the homes. Even if there is a drop in home prices, the amount of borrowers that end up owing more than what the house is worth will be a fraction of what it was."

Fewer loans today also have adjustable rate mortgages (ARMs), which are a riskier alternative to fixed-rate mortgages since homeowners might be stuck with making much higher monthly payments than they started with if rates rise.

"This should provide an extra layer of protection compared to 2008 as the borrowers today are more insulated to the rise in interest rates this year," O'Loughlin said.

Thomas Schopflocher, senior director of Global Structured Product Research at S&P Global Ratings, said that underwriting guidelines and mortgage products are generally more robust now than in the years leading up to the GFC.

"The underwriting was uneven [then]," Schopflocher told Newsweek. "There were risky mortgage products, for example, with teaser rates or those allowing people to take on much greater leverage than they should have been allowed—and would not be able to take on today. The easy credit contributed to rising home prices. Fast forward to where we are today. There have been a lot of reforms."

S&P Global Ratings does not think there is a housing bubble in the current market. Fundamental economic factors, such as an imbalance between supply and demand because there aren't enough new homes being built, still support home prices, Schopflocher said.

Prior to the GFC, consumers might have bought homes they couldn't afford and, in many cases, were "leveraged to the hilt," Schopflocher said.

For example, some might have taken out mortgages with loan-to-value ratios that exceeded 100 percent. This would incentivize people to "walk" when homes dropped in value because they had no equity or virtually no equity in the property.

"Nowadays, you typically do not see that kind of leverage," so people have more equity in their homes and they're less inclined to walk away from them if prices decline, Schopflocher added.

Cristian deRitis, deputy chief economist at Moody's Analytics, told Newsweek that demographics are a major difference between now and 2008. Then, there was a relatively small population of 30-year-olds, the "prime age for buying a home," coupled with a lot of homebuilding.

Today, there's a large segment of the population coming into their prime home-buying years during a housing deficit. The National Association of Realtors commissioned a report last year that found the U.S. had an "underbuilding gap" of 5.5 million to 6.8 million housing units since 2001.

"We have too much demand relative to supply, so a very different dynamic there," deRitis said.

He also cited the "very different lending standards" compared to 2008. Rules have changed in the mortgage market, so people have to be highly qualified and have their credit pulled multiple times throughout the process. Qualifying for a loan now is "not easy," deRitis said.

"If we do start to see home prices fall as we already have, borrowers won't have to sell or be forced to sell as much as they did during the 2008 crash," he added.

Mark Fontanilla, a consultant with DBRS Morningstar's U.S. RMBS team, told Newsweek that when the 2008 crisis hit, things were bad for everyone market-wide. But the scope of current conditions is not all-encompassing.

"Fundamentally, mortgages and housing are relatively stable." Fontanilla said. "In other words, delinquencies, defaults and foreclosures are still relatively low and contained."

Update 12/21/22, 5:15 p.m. ET: This story was updated with additional comments.