Bank of America Predicts Housing Market Resembles 1980s, Not like 2008 Crash

Bank of America's economists are offering a distinctive view on the current state of the housing market, drawing parallels between the ongoing situation and the conditions of the 1980s, rather than the 2008 crash. This analysis dives into key factors differentiating the two periods and highlights potential challenges on the horizon.

The Pre-2008 Era: Builders' Frenzy and Loose Lending Standards

In the years leading up to the 2008 crash, builders embarked on an unprecedented building spree, resulting in an oversaturated market. This overdevelopment ultimately contributed to the subsequent crash.

Additionally, obtaining a home loan during this period was notably easier. Lenders often forewent rigorous income verification, extending loans to risky borrowers. This lax lending environment, coupled with the prevalence of adjustable-rate mortgages, amplified the risks associated with homeownership.

Today's Market: Cautious Building and Stricter Loan Standards

Unlike the pre-2008 era, the current housing market displays a more measured approach to construction. While there has been an uptick in homebuilding over the past year, it significantly lags behind the frenetic pace of the early 2000s.

Moreover, prospective homeowners now face considerably higher standards. Lenders are far more discerning, conducting thorough assessments of applicants' financial stability. This shift has introduced a level of prudence absent in the years leading up to the 2008 crash.

Household Debt and Mortgage Dynamics: Then vs Now

In the years preceding the 2008 crash, household mortgage debt was alarmingly high, reaching 100% of disposable income. This precarious level of debt amplified the impact of the ensuing crisis.

In contrast, the current landscape presents a more favorable scenario. As of the second quarter of 2023, household mortgage debt accounts for a more manageable 65% of disposable income, reflecting a significant improvement in financial stability.

The 1980s Parallels: Inflation and Tightening Monetary Policy

Drawing a parallel with the 1980s, the current housing market is contending with heightened inflation. Inflation rates in both eras prompted the Federal Reserve to implement strategies aimed at curbing rising prices.

By March of 2022, the Fed had already initiated a series of rate hikes in response to escalating inflation. This proactive approach mirrors the actions taken in the early 1980s, further underscoring the similarities between the two periods.

Impact on Mortgage Rates and Homebuyers

The repercussions of the Fed's actions are notably evident in mortgage rates. In the early 1980s, mortgage rates surged from approximately 9% to a staggering 18%, substantially impeding the housing market.

In a similar vein, the rate for a 30-year fixed mortgage has more than doubled from 3% in January 2022 to 7.49% this month. This significant spike has introduced challenges for a new generation of homebuyers, echoing the circumstances faced by baby boomers in the 1980s.

Also Read: U.S. Housing Market Rebounds with Record High Home Prices