This ISN’T a Housing Bubble!

This ISN’T a Housing Bubble!

The headlines and media want us to believe we’re in or entering into a housing bubble. Yes, we have seen a market shift and you may be wondering what’ll happen next. Many people I talk with share concerns that we could seea repeat of what took place in 2008. I’m here to tell you, there’s concrete data to show why this is nothing like 2008!

There’s a Shortage of Homes on the Market Today, Not a Surplus

A healthy supply of inventory needed to sustain a normal real estate market is between four and 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. Yes, we’ve seen many homes reduce price and sell for less than they could have during the Spring Market. That’s not depreciation, that’s deceleration. You can read more about that in a previous blog I wrote.

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. Although we’re seeing more homes be offered for sale on the market, there’s still a shortage of inventory available based on the four to six month inventory standards for normal.

The graph below uses data from the National Association of Realtors (NAR) to show how this time compares to the crash. Today, unsold national inventory sits at just a 3 month supply at the current sales pace. Check for the July Market Snapshot blog in the next few days to see what inventory levels are like in King and Snohomish Counties.

One of the reasons inventory is still low is because of sustained underbuilding. We add that with ongoing buyer demand as millennials age into their peak homebuying years, we continue to see upward pressure on home prices, although likely at a much slower pace than the last two years. That limited supply compared to buyer demand is why the experts are saying home prices will NOT fall this time.

Mortgage Standards Were Much More Relaxed During the Crash

During the lead-up to the housing crisis, it was much easier to get a home loan than it is today and many loan programs simply were designed to fail (remember interest only loans?). The graph below 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 dangerously lowering lending standards and making it easy for just about anyone to qualify for a home loan or refinance their current home. Those lending institutions took on much greater risk in the mortgage products offered which led to mass defaults, foreclosures, and falling prices. I can even remember people voluntarily defaulting on their homes as values plummeted so greatly.

Today, things are very different as home purchasers face much higher standards from mortgage companies and many of those bad lending options have been eliminated. Mark Fleming, Chief Economist at First American, says:

“Credit standards tightened in recent months due to increasing economic uncertainty and monetary policy tightening.” 

Stricter standards, like there are today, help prevent a risk of a rash of foreclosures like there was last time.

The Foreclosure Volume 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. 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 below 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 and immediately withdrew their equity once it built up using those risky loan options. Then home values began to fall, and some homeowners found themselves in a negative equity situation and decided to walk away from their homes. These actions 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 that’s given homeowners an equity boost. According to Black Knight:

“In total, mortgage holders gained $2.8 trillion in tappable equity over the past 12 months – a 34% increase that equates to more than $207,000 in equity available per borrower. . . .”

With the average home equity now standing at $207,000, homeowners are in a completely different position this time.

Bottom Line

If you’re worried we’re 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. If you’d like to chat more about our local housing stats and forecasts, call/text me or email me and let’s connect!

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