Housing Market Crash

History Of Housing Market Crashes And What They Mean For The Future

November 24, 2023

The past few months have been a time of concern for many investors around the country and the globe. With a confirmed over 5 million cases of COVID-19 diagnosed in the US alone, markets have softened as a response to nationwide shutdown orders, travel limits, and other serious measures taken by the federal government to curb the spread of the virus. 

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The outbreak and spread of the coronavirus have stirred up old fears of a housing market crash in the US. Considering how much uncertainty the virus has caused around the world, these fears are not unfounded. Just a short time ago in 2008, the economy was in free-fall causing a collapse of the housing market that had repercussions for years to follow. People lost their homes and livelihoods on a massive scale. By 2010, the rate of joblessness had increased to almost 10% and once-prosperous neighborhoods saw spikes in vacancy rates. Real estate experts say that the ripple effects of the 2008 crash are still being felt today, which is why a crash this year could be a disaster of epic proportions. 

The real estate market typically follows a cycle of highs and lows on a continuous basis. History buffs will know that when it comes to the real estate market, land sales and real estate construction peak relatively consistently every 18 or so years. When uncertainty is in the air, lesser markets can easily crumble.  Buyers hold onto their funds, preferring to buy in stable markets when employment and economic performance are more consistent and success is more of a sure thing. 2020 has been the opposite of these characteristics, with unemployment hitting an all-time high of 14.7% and the country’s economy suffering a sharp decline.

Timeline Of Major Housing Crashes In The US

  • The Panic of 1837
  • The 1873 Stock Market Crisis
  • The 1929 Wall Street Crash
  • The Great Depression of the 1930s to 1940s
  • The 2008 Housing Bubble

Now, more than ever it’s important for investors to consider the history of housing crashes, the repercussions they have had, and what it could mean for the future of the market. Keep reading for a history of housing crashes in the US, and the reasons why 2020’s market will remain steadfast.

Housing Market Crashes From 1800-1900

The hundred years between 1800 and 1900 were trademarked by several peaks and busts in the real estate market, reminiscent of the markets today. The most prominent, early example took place in 1837 when the stock market peaked and launched a depression that would last until the 1840s. Known as the ‘Panic of 1837’, this financial crisis lasted until the late 1840s. 

The Panic of 1837 can be attributed to both domestic and international causes. Speculative lending standards, a land bubble on the edge of bursting, and a decline in the price of cotton all had a severe impact on the economy. By May of the same year, banks began to suspend payments and loans, and a recession lasting close to 7 years began. During this recession, the fallout caused banks and businesses to close their doors, workers to become unemployed numbering into the thousands, and the rate of joblessness to spike as high as 25%.

Bank lending would only become prominent again after the gold rush of 1849, with people establishing new lines of credit. With news spreading about the discovery of gold in multiple locales, there was a mass migration to these highly valuable areas. This was only a brief respite, however, as the Civil War broke out in the early 1860s. 2% of the US population was decimated by the time the war ended.

By 1873, a new crisis emerged prompted by falling stock prices, leading to below-average interest rates lasting several years. With a similar dip taking place in the 1890s, interest rates continued to stay low going into the 1900s, starting the new century on the back foot.

Housing Market Crashes From 1900-2000

The most notable crash of the 1900s took place in 1929, with the crash of Wall Street leading to the Great Depression. As a result of the crash, prices fell up to 67% with properties plummeting in value and bank lending decreasing as well. Just a decade before the real estate market had been booming with markets like Manhattan in New York representing almost 10% of all real estate wealth in the country. This same market lost over half it’s value by the end of 1933. The repercussions of this crash are thought to have affected property markets until 1960 when prices finally recovered.

The depression would continue until after the second world war where the economy and real estate markets were able to rebuild. The next cycle of real estate remained stable until the stock market hit another low in 1974. Leading up to the year 1970 inflation rose from under 2% to over 6%, causing the cost of a new home to nearly double.  Home prices continued to grow over the next 20 years, bolstered by legislation encouraging banks and lenders to grant funding with little regulatory oversight. 

Until the end of the 1990s, the market was boosted by increases in real estate collateral and growing credit options. On the surface, all appeared to be well, but there were still significant issues for real estate investors. A savings and loan crisis caused interest rates to rise, new home construction dropped to its lowest since World War II and housing prices were flat until the end of 1997.

Housing Market Crashes From 2000-2010

The most recent comparative market today is the first decade of the 21st century. Going into the early 2000s, the US and the rest of the world was going through a housing bubble. The rate of mortgage fraud skyrocketed, and the country entered into the century with an early recession. Despite these facts, the mortgage denial rate halved between 1997 and 2003.

By the end of 2006, the Federal Reserve had decreased interest rates from 6.25% to 1%  in an attempt to put off inflation. This caused a significant increase in the cost of lending and many borrowers saw their loan repayments escalate by 60%. During these few years, the Federal Reserve also had a looser approach to supervising banks and lenders, many of which abandoned loan standards such as measuring employment and income history in borrowers. With the cost of lending increasing so greatly and markets going through a correction, the bubble had to burst sometime. 

In 2007, real estate crashed completely with hundreds of thousands of homes going into foreclosure, multiple subprime lenders declaring bankruptcy and the market requiring government bailouts. The market continued to slow down, with flat prices and home sales being the biggest trend. The subprime mortgage industry suffered widespread collapses, including the closure of some of the nation’s biggest lenders at the time like New Century Financial. Real estate was not the only industry affected, with many other fields experiencing bankruptcies due to the credit crises. The global stock market also faced correction and volatility. 

Considered to be one of the biggest economical declines since the Great Crash of 1929, the 2008 housing market is still having palpable effects on the economy that are being felt today.

Housing Market Crashes From 2010-2020

The last ten years have been characterized by a journey to recovery for the real estate market. During the first half of 2010, 1.28% of all households in the US were in the foreclosure process. Since then, the number of foreclosures has fluctuated but the market has been more stable. The value of single-family homes increased steadily between 2012 and 2018, with the average property price being $261,600

Although there have been some indications that the market was picking up during this decade, it’s also easy to see the impact it has had on buyers today. Millennials are purchasing fewer homes than their same-aged counterparts did prior to the 2008 crash. Decreased homeownership has lead to an increase in renting. Between 2006 and 2014, the number of renters in the country’s biggest metros increased from 36.1% to 41.1%. Today, the majority of renting households spend the majority of their income paying rent. 

These aren’t the only repercussions brought about by the crash of 2008. Capital investment and income growth have lagged behind. Housing prices have started appreciating again, however, and by 2015 the number of foreclosure notices had decreased to its lowest in 9 years.

With these repercussions so recent in memory, and the impact still being felt today, it’s no surprise that another housing crash could have serious consequences. The outbreak of COVID-19 has sparked fears of another crash of the same severity as the crash of 2007-2008 and brought up questions about how it would be handled if it were to happen.

Is Another Crash Likely To Happen?

Thus far, the risk of a crash of the same magnitude as the one of 2008 is low. There are several reasons why the real estate market has continued to perform consistently despite the circumstances brought about by the coronavirus Despite dipping at the start of March, the housing market has already made a speedy recovery close to pre-pandemic levels.

At the start of this year, the economy was performing well with real estate outperforming other asset classes and widespread job growth. According to recent data gathered by Zillow, housing inventory is 20% lower than the same time last year, and sale listings similarly decreased. Despite this decrease, home sales were up 44% month to month and purchase applications for new homes have increased just as much.

Home values were up nearly 5% with the sales of new homes showing slight increases. These are signs that buyers are slowly getting back into the market and action taken by the federal government has helped to stabilize the market. Certain legislations such as the $2.2 trillion Cares Act have put measures into place protecting borrowers and helping them avoid delinquencies. Many lenders have put their own spin on this out there, providing borrowers with financial relief or flexible repayment options. This same act has also lead to the expansion of unemployment benefits.

The takeaway is that even though there is plenty of uncertainty in the market right now, the factors that originally caused the housing market to crash in 2008 are no longer present. Each crash or economic downturn has inspired new legislation, regulatory oversight, and measures that are taken to prevent such a severe crash from taking place again. While it may take some time for buyers to confidently return to the property market and invest again, historical data has shown that post-crisis there may even be a housing boom. This surge can take place due to lingering lowered interest rates, and the added government support and stimulus packages.

What To Expect Moving Forward

It’s natural for the real estate market to be cyclical in nature, with distinct highs and difficult lows. That means that even though these crashes are something to be aware of, they are a normal part of the economic process. 

Previous data has shown that the housing sector peaks around every 18 years, and between the years of 1800 and 2020 there have been many examples of these peaks. The uncertainty of this year may have had a toll on real estate across the country, but a crash of the magnitude of 2007/2008 is unlikely due to the many measures put in place to stop such an event taking place again. That does not mean that the market will be completely unaffected by the COVID-19 reality, as buyers keep a tighter hold on their purse strings until they are more confident in how the market will perform going forward.

It’s important for investors to consider previous housing crashes in order to strategize what they are going to do in the future. Following lows in the cycle, real estate markets tend to boom, and investors with a keen eye and patient hand can easily pick up on some great deals. Knowing the history of real estate crashes serves another key purpose; teaching investors that while real estate is more stable than other asset classes, it is key to protect your investments and approach the market strategically.

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