Why a 2008 housing crash can’t happen again

Since 2012, every year we have heard that it’s about to be 2008 all over again for the housing market, as people try to get attention by implying home prices are going to crash like they did starting in 2007 and ending in 2011.

However, the housing credit markets have changed in such a fashion that it is impossible to have the same credit markets we did in the run-up to the housing bubble crash. Today, I want to explain why it can never be housing 2008 ever again and why you don’t need to worry about a credit crisis like the one that created the Great Financial Recession.

1. Regulation

The biggest changes for housing and the U.S. economy were the 2005 Bankruptcy Reform Act and the Qualified Mortgage rule, which was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010 and implemented starting in 2014.

These two laws changed everything, basically preventing the country from over-leveraging on mortgages. Also, the guidelines for home-buying reverted back to sane terms, even though I still argue that lending standards remain liberal in America today. Also, the bankruptcy reform law made sure that people faced serious consequences if they filed for bankruptcy.

If you look at the chart below, you will see a massive rise in bankruptcy filings before the 2005 law was put into place. You can also see a massive rise in foreclosures and bankruptcies before the 2008 recession. After the housing bubble crash, we had the longest economic and job expansion in history, and housing foreclosure data hasn’t even reached pre-COVID levels. The two laws above are the main reason.

2. The 30-year fixed rate mortgage

A staple of the housing bubble boom in credit was adjustable rate mortgage (ARM) loans that allowed the credit expansion to grow more and more from 2002 to 2005. Regulation in the laws cited above killed that type of debt expansion and what happened after the financial crisis is that housing went back to its old boring 30-year fixed product. Now, homebuyers were going into the mortgage process looking much more after their FICO scores and they have continued that way for the last 15 years.

One thing about the 30-year fixed loan is that it’s a fixed debt product that allows you to gain financially every year after. Your wages rise every year, but your debt cost stays the same. This, in turn, gives you more money to spend or save on other things.

As you can see below, the FICO score data hasn’t changed much over the last 15 years; it simply looks awesome all the time. It was a bit different before the 2010 qualified mortgage law went into effect and the bankruptcy reform. However, when you add the regulation changes and the 30-year fixed loan into the mix, you can see that the housing market is nothing like 2008, nor will it ever be again, unless regulation changes and the 30-year loan is no more.

Conclusion

There are a lot of other economic variables that look different than housing in 2008, such as the massive amount of home equity homeowners have in the U.S. today. Back in 2010, more than 23% of homes were underwater and a lot of households didn’t have any equity, or just a little. That’s not the case anymore.

However, just focusing on the two regulation changes above explains where the housing market is today. If we didn’t have those laws passed and our housing market lived off ARM adjustable loans, then the housing economic discussion would be much different. This is not the case, nor will it ever be again, unless we change the regulations or abolish the 30-year mortgage.

As a country, we have been able to weather a lot of storms since 2010. I believe a big reason for that is these two regulation changes.