Real Estate Crisis Planning: 8 Lessons From The 2008 Real Estate Market Collapse

Since the end of 2022, the U.S. real estate market has been experiencing a downturn. 

The volume of property sales has reached its lowest level since 2010. Interest rates are high and the nation’s economy is struggling.

Many real estate agents have already seen their production fall by around 45%. This has led many in the industry to draw comparisons with the 2008 real estate crash.

This devastating event lit the fuse for the financial collapse that led to the Great Recession.

It was a difficult time for realtors as demand for homes dried up. Nationally, house prices fell by 27.4% over a six-year period. However, in some of the worst affected places, this number hit 50%. Many brokerages closed down, with several agents leaving the industry for good.

We don’t think that this current downturn will lead to the collapse of economies around the world as it did in 2008. 

But it is going to be painful for many realtors. 

That’s why this article explores the lessons that we in the industry can learn from 2008 and how it can help us weather the storm. 

What Happened in 2008?

Part of the reason why the real estate crash of 2008 was so bad is that the industry was at the heart of a wider economic bubble. 

Sub-prime mortgages inflate the real estate bubble

By 2006, mortgage debt had become a popular financial investment. Investors could buy the debt from multiple mortgages in a package called a mortgage-backed security (MBS).

MBSs were packaged based on the level of associated risk. The highest-risk debts, known as subprime mortgages, were also resold again as secondary packages called collateralized debt obligations (CDOs).

Many financial institutions like hedge funds and pension funds bought these products. 

Because mortgage lenders had effectively sold their debt as MBSs, they had more capital available to lend.

They used this to launch adjustable rate mortgages (ARMs). ARMs provided a very low interest rate for an initial period, but this increased substantially after a year or so.

Because MBSs were so popular, selling mortgage debt became lucrative. As a result, mortgage lenders were happy to lend to almost anyone at low interest rates—even people who had a high risk of defaulting on the loan. These high-risk loans were called subprime mortgages.

This drove up demand for property, and sales volume and property prices skyrocketed. 

Appetite for risk was high amongst most financial institutions and regulatory oversight was poor. 

Defaults burst the bubble

The bubble eventually started to burst around 2006, as property sales began to drop. More importantly, droves of homeowners began defaulting on their mortgages. 1 in every 54 U.S. households experienced a foreclosure on their home. 

This caused the value of mortgage-backed securities to collapse. This put extreme pressure on all of the institutions that had invested in these high-risk MBSs and many filed for bankruptcy—the most famous example being Lehman Brothers which folded with a record $613 billion in debt.

8 Lessons to Survive the Current Downturn

The situation today is very different to 2008. Lending practices are more responsible and homeowners are in a much stronger financial position.

The current real estate downturn has been caused by:

• The post-COVID boom in demand inflating an already growing housing bubble. 
• Poor buyer confidence due to economic difficulties.

We’re unlikely to see mass foreclosures or the financial system collapse due the real estate market. 

Nevertheless, the last time the real estate sector was this challenging was 2008, so it makes sense to look there for lessons on how we can survive the current downturn. 

1. Demand will return

In the past, the housing market has always recovered after a crash. House prices fell significantly during the great recession but then steadily recovered. By 2018, they were up 50% from their 2012 low and continued to grow up until 2022.

The fact is, everyone needs some place to live, so properties are always needed. The question is whether people can afford them. Currently, the poor economy is squeezing people’s spending and reducing buyer confidence. 

Demand is likely to return once house prices fall back in line with the cost of living and people’s wages. 

Lessons for realtors: Don’t panic. This is likely a short-term blip and your business can recover. Review your business model and your spending and look for ways to ride out this difficult period. Check out our article, How Brokers Recruit And Increase Production As Rates Rise, for some ideas.

2. But it might get worse first

Some recessions and real estate downturns experience a “false recovery”. This is when the market shows signs of recovery, only for it to lose momentum and drop to new lows. 

This is usually caused by more positive investors or property buyers who think the market has hit its bottom and want to take advantage of lower prices. 

However, if the market sentiment is still negative overall, prices will continue to drop once these positive investors have made their investments.

Lessons for realtors: Be cautious as the market recovers. Don’t start increasing your spending just because you have had a couple of good months. The market could be volatile for some time. Check out our article on how to cut costs using Paperless Pipeline. 

3. Risky lending makes the downturn worse

Some realtors provide mortgage brokering services to their clients. One of the biggest lessons from 2008 is that unrestricted lending is incredibly risky. 

The more high-risk mortgages out there, the more borrowers will default when the economy becomes challenging. And higher levels of default mean fewer profits for lenders and reduced confidence in real estate. 

Lessons for realtors: If you broker loans yourself, remember that high-risk lending may seem profitable in the short term, but you may regret it in the long run. Make sure the interest rates you offer are reasonable and that buyers pass a stress test. 

4. The best agents will survive

Prior to 2008, U.S. government agencies like Fannie Mae were launching policies designed to encourage home buying. 

This, coupled with the fact that selling property was so profitable, led many people to get involved in real estate—either as investors or as real estate agents. 

The number of U.S. realtors hit a high of 1.35 million in 2006, before dipping to around 999,000 in 2012. This number didn’t recover until 2018. 

The fact is, some agents are only in it for the money, not because they love the property business. These people are likely to disappear when the going gets tough. The best agents who are dedicated to their profession and care about providing good service will survive. 

Lessons for realtors: Today there are 1.56 million real estate agents—a record number. A large number will likely leave the industry. This will create opportunities for those who remain and find themselves at the forefront of the recovery. Continue building great relationships with new and existing clients and you’ll eventually reap the benefits. 

5. We may be on the cusp of a recession 

Eight of the last ten recessions since World War II have been preceded by a real estate downturn.

That’s because property value plays a critical role in the economy. Housing is one of the biggest costs or investments that most households make, so homeowners have a large proportion of their wealth tied up in property. 

Building and selling houses is also big business, as is providing rental accommodations to people who don’t own a home. 

A real estate downturn is therefore usually one of the first signs that the wider economy will slow down.

Lessons for realtors: Be prepared for buyer confidence to drop significantly and for your costs to increase. Think of ways to make your business more efficient by streamlining processes and cutting costs. Check out our article on Hal Bartnett of Southwest Realty in New Mexico. He made his brokerage more profitable by downsizing and streamlining.

6. Flexible agents can still make money

In 2008, regular home sales plunged. But the number of foreclosures soared to over a million—which led to a boom period for agents that worked these sales. Check out the story of this agent, who saw his business expand rapidly in the wake of the real estate crash.

We’ve recently spoken to several of our customers who have found new ways to make money in challenging environments. 

For example, Daniel McClam, President and Broker-in-Charge at Hawks Real Estate, told us how he had built a business around buying properties and selling them wholesale to institutional investors.

Also, Joe Weinzetl of Greater Midwest Realty explained how his business was experimenting with a range of new business models, including:

• Using Paperless Pipeline to make transaction coordination more efficient. 
• Giving agents the opportunity to earn passive income by offering mortgage loans to clients. 
• Renting out his company’s unused office space.
• Hiring out his in-house transaction coordinators under a different company name. 
• Providing a coaching and mentoring service to agents. 

Lessons for realtors: Challenge yourself to think about alternative income streams for your business. Don’t just keep doing the same thing if it’s not working for you and don’t be afraid to try something new. 

Make Your Transaction Management More Efficient with Paperless Pipeline

During challenging times like these, one of the best ways you can protect your business is to reduce losses and costs.

That’s where Paperless Pipeline’s transaction management software comes in. Here’s how we help make your business more efficient: 

• No more dropped balls: Can you afford for deals to fall through because someone forgot to submit critical compliance documents on time? Paperless Pipeline helps you avoid losing money to mistakes by ensuring your transaction management processes are seamless and watertight.
• More time selling: Paperless Pipeline automates many transaction management aspects. This allows you to spend more time selling properties, safe in the knowledge that all compliance and closing procedures are in hand. 
• Low price: Paperless Pipeline is cheaper than our competitors. Our prices start at $120 per month and include all training and set-up fees. 
• Low risk: We offer a two-week free trial and no cancellation fees. This makes switching to Pipeline incredibly low risk.
• Only pay for what you use: We don’t charge per seat like our competitors. Instead, we offer unlimited users and charge per transaction. This means that you pay more in the good times but save money during difficult times—like a housing market downturn. 

Try Paperless Pipeline today for free.