08/23/2022
๐ ๐๐ซ๐๐ฉ๐ก๐ฌ ๐๐จ ๐๐ก๐จ๐ฐ ๐๐ก๐ข๐ฌ ๐๐ฌ๐งโ๐ญ ๐ ๐๐จ๐ฎ๐ฌ๐ข๐ง๐ ๐๐ฎ๐๐๐ฅ๐
With all the headlines and buzz in the media, some consumers believe the market is in a housing bubble. As the housing market shifts, you may be wondering whatโll happen next. Itโs only natural for concerns to creep in that it could be a repeat of what took place in 2008. The good news is, thereโs concrete data to show why this is nothing like the last time.
๐๐ก๐๐ซ๐โ๐ฌ ๐ ๐๐ก๐จ๐ซ๐ญ๐๐ ๐ ๐จ๐ ๐๐จ๐ฆ๐๐ฌ ๐จ๐ง ๐ญ๐ก๐ ๐๐๐ซ๐ค๐๐ญ ๐๐จ๐๐๐ฒ, ๐๐จ๐ญ ๐ ๐๐ฎ๐ซ๐ฉ๐ฅ๐ฎ๐ฌ
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.
For historical context, there were too many homes for sale during the housing crisis (many of which were short sales and foreclosures), and that caused prices to tumble. Today, supply is growing, but thereโs still a shortage of inventory available.
The graph (Image-1) uses data from the National Association of Realtors (NAR) to show how this time compares to the crash. Today, unsold inventory sits at just a 3.0-monthsโ supply at the current sales pace.
One of the reasons inventory is still low is because of sustained underbuilding. When you couple that with ongoing buyer demand as millennials age into their peak homebuying years, it continues to put upward pressure on home prices. That limited supply compared to buyer demand is why experts forecast home prices wonโt fall this time.
๐๐จ๐ซ๐ญ๐ ๐๐ ๐ ๐๐ญ๐๐ง๐๐๐ซ๐๐ฌ ๐๐๐ซ๐ ๐๐ฎ๐๐ก ๐๐จ๐ซ๐ ๐๐๐ฅ๐๐ฑ๐๐ ๐๐ฎ๐ซ๐ข๐ง๐ ๐ญ๐ก๐ ๐๐ซ๐๐ฌ๐ก
During the lead-up to the housing crisis, it was much easier to get a home loan than it is today. The graph (Image-2) showcases data on the Mortgage Credit Availability Index (MCAI) from the Mortgage Bankers Association (MBA). The higher the number, the easier it is to get a mortgage.
Running up to 2006, banks were creating artificial demand by lowering lending standards and making it easy for just about anyone to qualify for a home loan or refinance their current home. Back then, lending institutions took on much greater risk in both the person and the mortgage products offered. That led to mass defaults, foreclosures, and falling prices.
Today, things are different, and purchasers face much higher standards from mortgage companies. Mark Fleming, Chief Economist at First American, says:
โCredit standards tightened in recent months due to increasing economic uncertainty and monetary policy tightening.โ
Stricter standards, like there are today, help prevent a risk of a rash of foreclosures like there was last time.
๐๐ก๐ ๐
๐จ๐ซ๐๐๐ฅ๐จ๐ฌ๐ฎ๐ซ๐ ๐๐จ๐ฅ๐ฎ๐ฆ๐ ๐๐ฌ ๐๐จ๐ญ๐ก๐ข๐ง๐ ๐๐ข๐ค๐ ๐๐ญ ๐๐๐ฌ ๐๐ฎ๐ซ๐ข๐ง๐ ๐ญ๐ก๐ ๐๐ซ๐๐ฌ๐ก
The most obvious difference is the number of homeowners that were facing foreclosure after the housing bubble burst. Foreclosure activity has been on the way down since the crash because buyers today are more qualified and less likely to default on their loans. The graph (Image-3) uses data from ATTOM Data Solutions to help tell the story:
In addition, homeowners today are equity rich, not tapped out. In the run-up to the housing bubble, some homeowners were using their homes as personal ATMs. 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 wave of distressed property listings (foreclosures and short sales), which sold at considerable discounts that lowered the value of other homes in the area.
Today, prices have risen nicely over the last few years, and thatโs given homeowners an equity boost. According to Black Knight:
โIn total, mortgage holders gained $2.8 trillion in tappable equity over the past 12 months โ a 34% increase that equates to more than $207,000 in equity available per borrower. . . .โ
With the average home equity now standing at $207,000, homeowners are in a completely different position this time.
๐๐จ๐ญ๐ญ๐จ๐ฆ ๐๐ข๐ง๐
If youโre worried, weโre making the same mistakes that led to the housing crash, the graphs above should help alleviate your concerns. Concrete data and expert insights clearly show why this is nothing like the last time.
