A recent survey revealed that many consumers believe there’s a housing bubble beginning
to form. That feeling is understandable, as year-over-year home price
appreciation is still in the double digits. However, this market is very
different than it was during the housing crash 15 years ago.
Here are four key reasons why today is nothing like the last time.
1. Houses Are Not Unaffordable Like They Were During the Housing Boom
The affordability formula has three components: the price of the
home, wages earned by the purchaser, and the mortgage rate available at the time. Conventional lending standards say a purchaser should not spend more than 28% of their gross income on their mortgage payment.
Fifteen years ago, prices were high, wages were low, and mortgage
rates were over 6%. Today, prices are still high. Wages, however, have increased, and the mortgage rate, even after the recent spike, is still well below 6%. That means the average purchaser today pays less of their monthly income toward their mortgage payment than they did back then.
In the latest Affordability Report by ATTOM Data, Chief Product Officer Todd Teta addresses that exact point:
“The average wage earner can still afford the typical
home across the U.S., but the financial comfort zone continues
shrinking as home prices keep soaring and mortgage rates tick upward.”
Affordability isn’t as strong as it was last year, but it’s much
better than it was during the boom. Here’s a chart showing that
difference:
If costs were so prohibitive, how did so many homes sell during the housing boom?
2. Mortgage Standards Were Much More Relaxed During the Boom
During the housing bubble, it was much easier to get a mortgage than
it is today. As an example, let’s review the number of mortgages granted
to purchasers with credit scores under 620. According to credit.org, a credit score between 550-619 is considered poor. In defining those with a score below 620, they explain:
“Credit agencies consider consumers with credit
delinquencies, account rejections, and little credit history as subprime
borrowers due to their high credit risk.”
Buyers can still qualify for a mortgage with a credit score that low,
but they’re considered riskier borrowers. Here’s a graph showing the
mortgage volume issued to purchasers with a credit score less than 620
during the housing boom, and the subsequent volume in the 14 years
since.
Mortgage standards are nothing like they were the last time.
Purchasers that acquired a mortgage over the last decade are much more
qualified. Let’s take a look at what that means going forward.
3. The Foreclosure Situation Is Nothing Like It Was During the Crash
The most obvious difference is the number of homeowners that were facing foreclosure after the housing bubble burst. The Federal Reserve issues a report showing the number of consumers with a new foreclosure notice. Here are the numbers during the crash compared to today:
There’s no doubt the 2020 and 2021 numbers are impacted by the
forbearance program, which was created to help homeowners facing
uncertainty during the pandemic. However, there are fewer than 800,000
homeowners left in the program today, and most of those will be able to
work out a repayment plan with their banks.
Rick Sharga, Executive Vice President of RealtyTrac, explains:
“The fact that foreclosure starts declined despite
hundreds of thousands of borrowers exiting the CARES Act mortgage
forbearance program over the last few months is very encouraging. It
suggests that the ‘forbearance equals foreclosure’ narrative was
incorrect.”
Why are there so few foreclosures now? Today, homeowners are equity rich, not tapped out.
In the run-up to the housing bubble, some homeowners were using their
homes as personal ATM machines. Many immediately withdrew their equity
once it built up. When home values began to fall, some homeowners found
themselves in a negative equity situation where the amount they owed on
their mortgage was greater than the value of their home. Some of those
households decided to walk away from their homes, and that led to a rash
of distressed property listings (foreclosures and short sales), which
sold at huge discounts, thus lowering the value of other homes in the
area.
Homeowners, however, have learned their lessons. Prices have risen nicely over the last few years, leading to over 40%
of homes in the country having more than 50% equity. But owners have
not been tapping into it like the last time, as evidenced by the fact
that national tappable equity has increased to a record $9.9 trillion. With the average home equity now standing at $300,000, what happened last time won’t happen today.
As the latest Homeowner Equity Insights report from CoreLogic explains:
“Not only have equity gains helped homeowners more
seamlessly transition out of forbearance and avoid a distressed sale,
but they’ve also enabled many to continue building their wealth.”
There will be nowhere near the same number of foreclosures as we saw
during the crash. So, what does that mean for the housing market?
4. We Don’t Have a Surplus of Homes on the Market – We Have a Shortage
The supply of inventory needed to sustain a normal real estate market
is approximately six months. Anything more than that is an
overabundance and will causes prices to depreciate. Anything less than
that is a shortage and will lead to continued price appreciation. As the
next graph shows, there were too many homes for sale from 2007 to 2010
(many of which were short sales and foreclosures), and that caused
prices to tumble. Today, there’s a shortage of inventory, which is
causing the acceleration in home values to continue.
Inventory is nothing like the last time. Prices are rising because
there’s a healthy demand for homeownership at the same time there’s a
shortage of homes for sale.
Bottom Line
If you’re worried that we’re making the same mistakes that led to the
housing crash, the graphs above show data and insights to help
alleviate your concerns.
Sally Grenier
Broker Owner
Grenier Real
Estate
sally@sallygrenier.com
303-475-4508
Cell
www.sallygrenier.com