Why This Housing Market Is Not a Bubble Ready To Pop

Why This Housing Market Is Not a Bubble Ready To Pop

Homeownership has always been a major element in achieving the American Dream. A recent report from the National Association of Realtors (NAR) finds that over 86% of buyers agree homeownership is still the American Dream.

Prior to the 1950s, less than half of the country owned their own home. After World War II many returning veterans used the GI Bill benefits to purchase a home and since then, the percentage of homeowners throughout the country has increased to the current rate of 65.5%. The continued desire for homeownership has kept home values appreciating ever since. The graph below tracks home price appreciation since the end of World War II:

You’ll notice the only time home values dropped significantly was during the housing boom and bust of 2006-2008. If you look at how prices spiked prior to 2006, it looks a bit like the current spike in prices over the past two years which has lead some people to be concerned we’re about to see a similar decrease in home values as we did when that bubble burst. Well I don’t believe that is going to happen. Why? Let’s take a look:

What Caused the Housing Crash 15 Years Ago?

Foreclosures flooded the market in 2006 and drove down home values dramatically. The two main reasons for the flood of foreclosures were:

  1. Many purchasers were not truly qualified for the mortgage they obtained, which led to more homes turning into foreclosures. Lending products like interest only loans flooded the market and were a ticking time bomb for new homeowners when payments skyrocketed.

  2. A number of homeowners cashed in the equity on their homes and when prices dropped, they found themselves in an underwater situation. Many of these homeowners walked away from their homes, leading to more foreclosures. This lowered neighboring home values even more.

This cycle continued for years and lending practices greatly changed.

Why Today’s Real Estate Market Is Different

Here are two reasons today’s market is nothing like the one we experienced 15 years ago.

1. Today, Demand for Homeownership Is Real (Not Artificially Generated with those poorly designed lending products)

Until 2006, banks were creating artificial demand by lowering lending standards and making it easy for just about anyone to qualify for huge home loans or refinance their current home. Today, purchasers and those refinancing a home face much higher standards from mortgage companies.

Data from the Urban Institute shows the amount of risk banks were willing to take on then as compared to now.

When banks loan money there is always risk. Leading up to the housing crash 15 years ago, lending institutions took on much greater risks in both the person and the mortgage product offered, as mentioned above. That led to mass defaults, foreclosures, and falling prices.

Now we see the demand for homeownership is real and generated by a re-evaluation of the importance of home. We also see lending standards that are much stricter than the past lending environment. Purchasers can afford the mortgage they’re taking on, so there’s little concern about possible defaults.

And if you’re worried about the number of people still in forbearance, you should know there’s no risk of that causing an upheaval in the housing market today. There simply is no reason to see a flood of foreclosures.

2. People Are Not Using Their Homes as ATMs Like They Did in the Early 2000s

When prices were rapidly escalating in the early 2000s many thought it would never end. People were borrowing against the equity in their homes to buy new cars, boats, and go on vacations. When prices started to fall, many of these homeowners went underwater and some decided to abandon their homes. This increased the number of foreclosures.

Homeowners didn’t forget the lessons of the crash as prices skyrocketed over the last few years. Black Knight reports that tappable equity (the amount of equity available for homeowners to access before hitting a maximum 80% loan-to-value ratio, or LTV) has more than doubled compared to 2006 ($4.6 trillion to $9.9 trillion).

The latest Homeowner Equity Insights report from CoreLogic reveals that the average homeowner gained $55,300 (nationally) in home equity over the past year alone where locally we’ve seen that gain be $96,000. Odeta Kushi, Deputy Chief Economist at First American, reports:

“Homeowners in Q4 2021 had an average of $307,000 in equity – a historic high.”

ATTOM Data Services also reveals that 41.9% of all mortgaged homes have at least 50% equity. These homeowners will not face an underwater situation even if prices dip slightly. Today, homeowners are much more cautious.

Bottom Line

The major reason for the housing crash 15 years ago was a tsunami of foreclosures. With much stricter mortgage standards and a historic level of homeowner equity, the fear of massive foreclosures impacting today’s market is not realistic. If you would like to chat further, call or text me anytime!

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