We are NOT in a Housing Bubble
Homebuyers are beginning to believe we are heading into a housing bubble. It is easy to acknowledge this premonition, as year-after-year home price appreciation has continued to remain in the double digits. However, we are here to put your mind at ease as this market is very different from it was during the housing crash 15 years ago.
1. Houses Are Affordable Unlike During the Housing Boom
To understand this, one must understand the affordability formula. The affordability formula consists of three parts: the price of the home, wages earned by the purchaser, and the mortgage rate available at the time of purchase. Conventional lending standards suggest a purchaser should spend no 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%. While today's home prices are high, wages have increased significantly, and despite the latest spike, mortgage rates are still well below 6%. This means that Today's average buyer spends less of their monthly income toward their mortgage payment than buyers did back then.
Undeniably, affordability is not as strong as it was last year, but it is significantly better than it was during the boom. The graph below demonstrates that difference:
2. Mortgage Standards Were Much More Relaxed During the Boom
Getting approved for a mortgage loan was significantly more attainable during the housing bubble than it is today. According to credit.org, a credit score between 550-619 is considered poor. They define those with a score below 620, by stating, "Credit agencies consider consumers with credit delinquencies, account rejections, and little credit history as subprime borrowers due to their high credit risk."
While buyers can still qualify for a mortgage with a credit score within that range they are considered riskier borrowers.
3. Foreclosures Are Completely Different Than They Were 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:
Undoubtedly the 2020 and 2021 numbers are impacted by the forbearance program, which was created to help homeowners facing uncertainty during the pandemic. Keep in mind, there are less than 800,000 homeowners remaining in the program today, and the majority of those will be able to work out a repayment plan with their banks.
Why are there significantly fewer foreclosures seen today? Well, homeowners, today are equity rich. They are not tapped out.
During the build-up to the housing bubble, some homeowners were using their homes as personal ATMs. We saw a plethora of people withdrawing their equity the moment it was built up. When home values began to fall, many homeowners found themselves in a negative equity situation where the amount they owed on their mortgage had surpassed the value of their home. Many were faced with the decision of walking away from their homes. When that happened it led to a rash of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of comparable homes in the area.
Homeowners have since 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 as they had previously, as indicated 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 will not happen today.
There will be nowhere near the same number of foreclosures as we saw during the crash. What does that mean for the housing market today?
4. There is Not 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. The following graph demonstrates, the surplus of homes for sale between 2007 to 2010 (many of which were short sales and foreclosures). That caused prices to tumble. Today, there is a shortage of inventory, which is creating the increasing home values we are witnessing today.
See below the months of supply of existing homes for sale in December of each year.
Inventory is drastically different in comparison to last time. Prices are rising because there is a healthy demand for homeownership while at the same time there is a shortage of homes for sale. If you are considering buying or selling and would like to dive deeper into this subject I would be happy to schedule a consult with you.