Is a 2000s-style Housing Collapse Imminent?

Jason Hartman
5 min readAug 8, 2022

Are we in for another housing collapse?

That’s the million dollar question people are asking now in our time of economic uncertainty. Housing bubbles usually consist of a surge in housing prices that’s largely driven by heightened demand, speculation, and exorbitant spending. Bubbles of this nature usually begin with a surge in demand against the backdrop of limited housing supply.

Subsequently, speculators inject money into the market, thereby bolstering demand. Eventually demand decreases or reaches a point of stagnation as the housing supply increases, thereby causing a precipitous drop in prices. If you’ve hit the books hard enough, such a scenario may seem familiar to you. With so much sensory overload that we are subjected to, the housing bubble of the 2000s feels like it was an eternity ago. Nevertheless, it’s still important to pick up lessons from this economic upheaval.

Like all bubbles, the housing bubble of the 2000s was brought about by large inflows of money into housing markets. But that was only scratching the surface. Lax lending conditions and government policy designed to encourage more home ownership played a significant role in accelerating this crisis.

The genesis of these policies began with the passage of the Community Reinvestment Act that compelled banks to make loans to “traditionally underserved markets” and other lower-income areas. The homeownership mania reached frightening levels as interest rates fell and lending requirements became shockingly lax. According to some estimates, 20% of mortgages in 2005 were granted to individuals who would not have met the qualifications under normal lending standards. These individuals became the notorious subprime borrowers who played a significant role in accelerating this crisis.

In addition to specific housing policies, one of the institutions that played an instrumental role in inflating this bubble was the Federal Reserve. After the Dot-com bubble burst, the Fed slashed interest rates and kept them down in order to fight the mild recession that came in the aftermath of the technology bust. Unsurprisingly, the major injection of credit and money combined with a government policy that incentivized home ownership caused home prices to soar. Shortly thereafter, more individuals got into the game of flipping houses. The underlying assumption was that this party could go on forever as people bought and sold houses in order to strike it rich.

The government prompted banks to slash their rates and lending requirements, thus kicking off a mania in home purchases that propelled the median sales price of homes by roughly 55% from 2000 to 2007. Eventually, realities began to set in 2006 when interest rates started climbing upwards. In turn, adjustable-rate mortgages started resetting at higher rates as it became clear that an economic slowdown was in order during 2007.

In turn, investors started getting cold feet when they realized that the risk premium was too much for them. On the home buyers’ end, they soon realized that home values could actually fall, which caused a sharp drop in housing prices. Soon, a massive sell-off of mortgage-backed securities occurred.

Housing prices would subsequently decline by 19% from 2007 to 2009. The large wave of mortgage defaults that took place during this period would result in millions of foreclosures in the ensuing years. The collapse of the housing bubble was one facet of the global financial crisis that rocked the world from 2007 to 2009.

In sum, housing bubbles are generally spurred by abnormal economic behavior such as excessive levels of investment, speculation, manipulated demand, and gluts in liquidity.

Fast forward to 2022, most of the world is facing supply chain disruptions and mass inflation.These are a unique set of upheavals that are affecting millions of people. You’re probably wondering how housing is holding up amid these circumstances. Will there be a 2000s style collapse in the housing market?

Allow me to clear the air here.

We’re not going to see a 2000s-style housing crash!

For one, the lending standards are much stricter than before. Plus, the entry level housing segments are very under-supplied. Overall, inventory is slowly increasing but we still have a long way to go to reach normal inventory levels.
I want to stress one point: Irrespective of the economic environment, people will still need housing.

I know I sound like a broken record, but I will say it again. The home is the center of the universe. This axiom is what I hammer home at Empowered Investor Pro.

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