Housing bubble concerns persist but this is no '08 crash, experts say

Experts today have become reluctant to deny the existence of housing bubbles given widespread monthly home-price declines, and the experience during the Great Recession.

Just before that mortgage meltdown that occurred then, several pundits issued varying statements to the effect of "this is not a bubble, this is just local," recalled Gunnar Blix, director, housing market research at Black Knight, during a panel at Information Management Network's Residential Mortgage Servicing Rights conference in New York on Tuesday.

"I'm a little wary of becoming that guy," he said. "But I do think it's different from 2008."

Home prices are generally now down from their peaks, as reflected by record equity depletion in the third quarter, but in most cases they're still up year-over-year, noted Blix. They're also generally elevated compared to where they were pre-pandemic. That leaves borrowers in many areas with enough of a cushion in home value to continue incentivizing loan repayment, he said.

"There's still room for some of these markets to fall," he said.

Domonic Purviance, a subject matter expert for the Federal Reserve Bank of Atlanta, expressed similar sentiments, acknowledging downward pressure on the housing market, but characterizing it as less severe than that seen in the last downturn.

"I think this is not 2008, we're not going to see, hopefully, an increase in delinquencies and defaults," said Purviance, noting that his comments reflected only his individual views.

"We don't have a lot of oversupply, like we did in 2008, so the fundamentals today are a little bit stronger," Purviance added. "The biggest challenge is affordability, and how we resolve that moving forward."

While household formation has been driving excessive demand in recent years, affordability constraints have grown with the rise of interest rates. That's curtailed some of the demand, as emerging generations make alternative choices like continuing to live with family rather than buying a home.

"We reached a point where people are starting to make different decisions where household formations are concerned," Purviance said.

However, the market is likely to avoid the kind of oversupply seen in 2008, which resulted from excessive lending without proper consideration of ability-to-repay, in part because the rise in rates is naturally curtailing the availability of existing homes as demand falls.

"Most mortgages today have rates that are less than 5%, so people are disincentivized to put their house on the market to sell. So at the same time we have rates go up and… a contraction in demand, we also have this limitation on supply," said Purviance.

How this all shakes out will likely play a big role in what happens next to housing, he said.

"The question is, will we see a significant contraction in home prices? And the answer is, it depends on who between supply and demand," Purviance said.

Regionally, limitations on housing demand and equity could reverse some price gains that occurred because people from states with higher values, like in the Northeast, could sell homes to live in less expensive regions, such as the Southeast.

"Now if you can't sell your house in California or New York/New Jersey, that means you don't have the same amount of cash or you don't have any cash or any incentive to move," Purviance said. "So now prices have to adjust back to the local buyers and that, to me, is the biggest challenge for home prices."