A Low Historical Supply
With a limited inventory and over a decade of tight lending standards, housing values will not plunge as they did during the Great Recession.
A surprising 44% of Americans thought the housing market would crash and values would plunge, according to a LendingTree survey conducted at the end of last year. A shocking 52% of millennials believed in a 2024 crash. The same study was conducted at the end of 2022, and 41% of Americans thought housing values would nosedive in 2023. The market did not collapse in either 2023 or 2024. How could so many convinced Americans get it wrong?
The Great Recession was a painful downturn for housing. So many homeowners were burned as values cratered and equity evaporated seemingly overnight. Everyone was affected by it personally, or they knew someone who was painfully impacted and left with nothing. It was the most devastating period for housing since the Great Depression. As a result, the immediate knee-jerk response to any slowdown in housing is that values will tumble once again like they did during the Great Recession.
In 2018, when rates climbed from 4% to 5%, many believed housing values would plunge. At the beginning of COVID, when the economy came to a screeching halt and many homeowners entered forbearance, the market was expected to tilt heavily in the buyer’s favor. And, when the Federal Reserve raised the Federal Funds Rate eleven times between March 2022 and July 2023, the housing bubble was supposed to pop. Yet, that did not occur.
There are many reasons housing has not crashed over the years despite the continued sentiment that it was inevitable. There will not be a plunge in home values because there are simply not enough available homes to purchase. When the inventory builds, it takes longer to sell. When the unsold inventory rises above 200 days, negotiations lean heavily in favor of buyers and sellers. The unsold inventory in Los Angeles, according to the California Association of REALTORS®, reached a peak for 2024 in September at 108 days. The peak for 2023 was 84 days in October, faster than today. The 3-year average unsold inventory peak before COVID (2017 to 2019) was 136, slower than today. The difference is striking in comparing today’s unsold inventory to the two years leading up to the Great Recession, 2006 and 2007. The unsold inventory peak in 2006 was 288 days, and it was 590 in 2007.
The unsold inventory remains considerably lower than in the years leading up to the Great Recession because the supply of available homes today remains very low. Today’s inventory of available homes is at 10,632 homes. While there were 26% more homes this year compared to last year, the 3-year average before the pandemic was 10,998 homes, 3% more than today. The inventory has been stuck at low levels for years now. In comparison, the inventory in 2006 exceeded 20,000 homes, surpassing 30,000 in 2007. In sharp contrast to today’s lack of available homes, an inventory glut led up to the Great Recession.
Since the Federal Reserve raised the short-term rate, demand has plummeted to levels that rival the Great Recession. They have remained low since the second half of 2022. Yet, that low demand has been matched up against very little supply. Today’s unsold inventory is at 99 days, a far cry from 2006’s over 250 days and 2007’s over 500.
Even in today’s high mortgage rate environment, values have risen year-over-year. According to Freddie Mac’s House Price Index, the Los Angeles/Orange County metro has grown by 6% year-over-year through October. In 2023, home values rose by 8%. The low inventory has continued to place pressure on prices and has not allowed values to plunge despite severe affordability constraints.
Today’s United States housing stock is the strongest ever. Since the Great Recession, buyers have purchased homes with strict qualifications, strong credit, great jobs, and low fixed payments. There is record tappable equity (the amount of equity a homeowner can use for a loan while still retaining 20% equity), record equity rich (50% plus equity), and a record number of homeowners who own their home free-and-clear. There will be no housing crash because of the strength of the homeowner and the limited supply of homes available to purchase.
