Is a housing catastrophe on the horizon for the US? Experts claim that it is not 2008.

A historic slowdown in price growth, sharply increasing mortgage rates, and a sharp drop in house sales have stoked fears that the housing market may fall.

For the first time in over two decades, the mortgage rate surpassed 7 percent this past week. According to statistics issued by the Census Bureau on Wednesday, new house sales decreased by 11% in September while U.S. home prices had a historic slowdown in August, dropping by 2.6 percent.

However, analysts contend that these market patterns are a sign of a correction after two years of rapid expansion and that the current economic environment lacks certain crucial components that were present before the 2008 housing catastrophe.

The Federal Reserve and Congress made measures to boost the economy before the epidemic had started. The federal reserve cut borrowing rates to around zero percent, and Congress approved COVID-19 relief measures to help struggling Americans and small companies pay their staff.

Due to historically low mortgage rates, fierce competition fueled by a lack of available inventory and distant employment possibilities, and skyrocketing property prices, the housing industry thrived despite the economic downturn.

But in order to control the sky-high inflation that has stubbornly lingered above 8 percent for months, the Federal Reserve has implemented a series of interest rate rises since March.

Mortgage rates have soared as a consequence of the central bank’s actions, reaching 7 percent this week for the first time since 2002. As the Federal Reserve fights inflation and raises interest rates, mortgage rates may rise much more.

Due to the high listing costs, it has become increasingly difficult for purchasers to afford monthly payments. New homes sold last month had an average sales price of $517,700 and a median sales price of $470,600.

Rising mortgage rates have led to historic price deceleration and a general decline in demand, which has been fuelled by falling new house sales.

Another indication of a sizable contraction was the decrease in the number of residences under contract for the fourth consecutive month.

Prior to sub-3% mortgage rates igniting a homebuying frenzy in 2020 and 2021, the housing market’s decline up to this month may be characterized as a kind of return to pre-pandemic circumstances, according to a study published on Thursday by Taylor Marr, deputy chief economist at Redfin.

“However, pending sales and mortgage purchase applications are now below 2018 levels. A major correction is a four-year setback. We are likely to see additional sales drops since mortgage rates are still high, but ultimately, this should result in lower prices for those who must relocate this winter, Marr said.

The property market and the overall economy, analysts claim, are significantly different from the 2008 financial crisis, when the housing bubble burst, even in the midst of the slump.

“There was a surplus of home inventory at that time. According to Robert Dietz, chief economist for the National Association of Homebuilders, there has been an overbuilding of homes compared to household formations.

It took some time for the housing glut to be reduced, according to Dietz. “You had a lot of risky mortgage underwriting that put us in a position where when home price declines occurred and then combined with a rising unemployment rate [there were] lots of underwater mortgages and rising foreclosure rates,” he said.

Following the housing bubble, over ten years of under building led to the current shortfall of at least 1 million dwellings. The fact that the millennial generation entered adulthood at the tail end of this underproduction period added to this.

Prices may also be capped by the continuous demands of millennials, according to Yelena Maleyev, a KPMG Economics analyst, who spoke with The Hill.

“Millennials will keep living beyond their peak years for purchasing a property. For many years, household formation has outpaced new construction, according to Maleyev.

Because individuals could still need to move even at a 7% mortgage rate, the undersupply will still act as a bit of a ceiling on how low prices can go. Even if a person doesn’t necessarily want to, there are life factors that force them to purchase a home, Maleyev said.

When compared to the period before the financial crisis, lending criteria today have undergone significant changes. According to Jason Sharon, mortgage broker and owner of Home Loans Inc., previous procedures made it simple for purchasers to qualify for loans even if they did not have a supporting income, as stated to The Hill.

But lately, standards have altered, particularly after the Dodd Frank Act was passed, named for former legislators and bill supporters Sen. Christopher J. Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.).

“As a result, credit limits were tightened, and it became necessary to verify employment, assets, and income. Now, you can’t acquire a conforming loan without fulfilling strict paperwork standards, according to Sharon.

The early 2000s financial crisis was significantly different from other economic concerns, such as unemployment. According to Labor Department statistics, the unemployment rate was at 5% in December 2008 before rising to 9.5% by the middle of 2009.

Given that the jobless rate dropped to 3.5 percent last month, the situation seems to be improving.

Additionally, the third quarter of this year saw increase in the United States. According to data made public by the Commerce Department, the GDP increased at an annualized pace of 2.6 percent. However, these numbers haven’t allayed worries about a coming recession.

However, according to the most recent GDP data and employment rate, the United States has so far escaped a recession.

The expenditure on residential building fell by 26.4 percent in the third quarter, which was bad news for the housing industry. The 17.8 percent fall in the second quarter is nearly 10 percentage points lower than this.

Although Dietz noted the figures should be seen in perspective, economists anticipate additional reductions in the housing market.

When considering a market where prices have increased by 40 or 50 percent over the past two years, Dietz said, “I think we have to kind of put some of the expected readjustment, painful as it will be, into some perspective. A pullback of 15 percent still leaves the market considerably higher priced than where it was two years ago.”