In 2008, America was staring down the barrel of the worst economic crisis since the Great Depression. The economy was in freefall. The subprime housing loan market bubble had burst with such ferocity that millions of families were affected, and many were left homeless, creditless, and without hope. Yet a mere 10 years later and the U.S. housing market is poised for a second consecutive record-breaking year, according to Boston Globe.
The recovery happened swiftly, and it just goes to show how resilient the real estate market is. Historically, growth in residential home values has outpaced both inflation and yearly wages, and at the end of 2017 they were 6% higher than the highest ever peak in 2006.
Why is the housing market so resilient? Ten years after the crash, let’s take a look back at what exactly happened in 2008 that brought it all tumbling down.
Obviously, it costs a lot to build a new house. But where does the seemingly extreme cost come from? When we dig into this question we find some of the immediate expense, and what it doesn’t necessarily account for.
First, we need some raw materials. Some of these are renewable, some of them are not. In metal materials alone, the four most common in construction are aluminum, copper, carbon steel, and stainless steel. These need to be mined, fabricated, shipped and installed by contractors. Next, you have the wood, cement, and insulation. Plumbing and electricity follow, so ceramic, piping, wires, and circuitry are installed. In material alone, a house already becomes expensive.
Second, labor and machining costs are drastic. Digging the foundation of a new home, mixing and pouring cement, and framing all account for a significant chunk of change. But before all of this comes the less than efficient commissioning process. You, the interested real estate investor, want to build a residential home. You then employ a general contractor who in turn must go find an architect, engineer, laborers, landscapers, interior designers, and all the workers that are needed to build a house. The fact that they all work on a contract basis means the price stays high, and the level of organization often leaves something to be desired.
Because of all of these costs, the average price of building a new home in 2018 is $288,280. This is certainly one of the reasons why most real estate construction investments happen in the commercial sector. Yet no matter the cost or the risks, Americans are still building a lot of houses in 2018.
What happened in 2008?
Prices for homes crashed into oblivion while foreclosures happened left, right, and center. Currently, 0.5% (or one in 200) homes are foreclosed upon, and there are very strict state laws regarding giving the resident notice. In 2008, that number was one in every 54 homes. Why?
The abridged version is that banks were giving out adjustable rate mortgages like candy to people that could not afford them. Then, major financial institutions snapped up bundles of these junk loans. When the rates rose, people had no way of paying. This resulted in foreclosure, repossession, and sale at auction.
Except, no one could afford to buy the repossessed homes, causing the banks to also eat a huge loss. Bad news.
Today, though, the American residential housing market is alive and well. And even after the housing downturn, the U.S. construction market is the second-largest in the world, boasting a 210% market share. Mistakes were made, but real estate is in yet another period of growth. Though residential real estate might not be the best business investment, chances are if you buy a home today and can afford to pay for it, by the time you go to sell, it will be worth much more. At least, that’s what history would say.