how did the housing market get so inflated, and is it different from what happened in 2008?

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how did the housing market get so inflated, and is it different from what happened in 2008?

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2008 was primarily an issue of giving mortgages to people that had no business getting them. They were giving mortgages to people with horrible credit scores, people with super low down payments, etc.

These mortgages were then repackaged and sold as groups of mortgages. The idea was that if you put thousands of mortgages together, it’s highly unlikely they’d *all* fail, and that the ones that succeeded would pay off the failures. This general concept makes sense; the more mortgages in a group, the safer the group is to buy. This is called a mortgage backed security.

These mortgages were mostly fine as long as the housing market kept going up. People could sell their houses and cover the entire mortgage in an emergency because the house was going up in value so fast.

This became an issue when the housing market slowed down. All of a sudden, you had people making 60k a year that couldn’t even come close to covering their mortgage. When these started failing, the mortgage backed securities described above started to crater in value. Unfortunately, banks and 401k providers were holding a LOT of these. When banks start failing, businesses can’t get loans and people lose their savings. This spiraled out of control pretty quickly.

2022 is a different time. We put into place regulations about what sorts of mortgages we can give out, so the failure risk is a lot lower. We also put into place regulations that are designed to prevent banks from purchasing risky assets in the large quantities they did in 2008.

2022 inflation is partially driven by pandemic stimulus money. It’s also partially driven by remote work, which means less people need to live in the city. A housing market crash is possible because of this, but it (in theory) shouldn’t cause a major financial crisis due to the regulations mentioned above.

This isn’t an exact ELI5 article, but it is a good read as to how we got here.

Supply also has a lot to do with it. The supply chain during Covid made it difficult for building materials to get to destinations to built new homes. Affluent home buyers wanted to move out of the (Covid-ridden) urban areas into the suburbs. Interest rates were at an all time low.

https://www.forbes.com/advisor/mortgages/why-houses-are-expensive/

Covid also had a huge impact on pricing as builders were forced to stop working and resource shortages led to a reduction in supply. Demand remained constant while supply was restricted. Now there is a huge demand with limited supply that leads to increased prices. It will take years for the supply to catch up to the demand.

I have read one reason is big corporations buying up housing, then renting them & selling them at inflated prices, inventories so low bidding wars are common along with for going inspections

Some good answers here, but there’s a glaring detail that hasn’t been mentioned yet, and that’s interest rates. Tldr at the bottom.

Federal banks only really do one thing: choose how much money is out there. They do this by lowering the interest rates in the country. Private banks like Wells Fargo or Bank of America can then hand out loans at cheaper rates, hence putting more money into the pockets of everyday people.

During the pandemic, people needed money because the world shut down. So the federal bank dropped interest rates. A lot. A huge, historic amount, actually.

At this point, everyone was thinking of buying a home because why not? Those who kept their jobs had money, were stuck inside, and banks made it really easy to get a mortgage.

TLDR: 2008 was a different story. Banks were corrupt and gave mortgages to people who really didn’t have the money. 2020-2022 is different in that a lot of people had the money, and had every reason to spend it. So they spent it on homes.