If you’ve been reading or listening to the news, it’s hard not to think that the market is in some kind of housing bubble.
Still, it’s possible for the housing market to shift, leaving you asking questions about where it’s headed. With those kinds of concerns, the dramatic events that led to what happened in 2008 come to mind.
Today’s Housing Market Features A Shortage Of Homes, Not A Surplus
In a normal real estate market, we see that the inventory supply needed to sustain it is about six months. When there is more than that, it can lead to overabundance. That is what causes prices to fall. When there is less than that, we have a shortage. That is when we see prices continue to appreciate.
In taking 2008 as a point of comparison, there were simply too many homes available. Many of those were short sales and foreclosures. That availability sent prices falling. Now, though, the housing supply is growing, but there is still an inventory shortage.
Using data from the National Association of Realtors (NAR), the following graph represents how current data compares to the financial crash. Currently, we see a 3.0-months’ supply of unsold inventory at the current sales price.
What’s keeping inventory so low? That’s one of the effects of sustained underbuilding. That’s pairing with the buying demand of millennials aging into their prime buying years to create an upward force on home prices. It is exactly this limited supply in comparison with strong buyer demand that has experts forecasting a different outcome for home prices this time around.
Mortgage Standards Are Stricter Now Than They Were Then
Getting a loan today is much harder than it was during the time just before the 2008 housing crisis. The next graph presents data from the Mortgage Bankers Association (MBA) on the Mortgage Credit Availability Index (MCAI). In short, the higher the number is, the more straightforward the process to get a mortgage.
As you can see in the buildup to 2006, lowered lending standards by the banks led to artificial demand. In turn, it was easy for almost anyone to either qualify for a new home loan or refinance their existing mortgage. During that time, we saw lending institutions taking on a much greater share of the risk for both the person insured and the mortgage products offered. The rest is history, with mass defaults, foreclosures, and falling prices following quickly after.
That’s not the case today. Mortgage companies hold up higher standards for interested purchases. The Chief Economist at First American, Mark Fleming, said:
“Credit standards tightened in recent months due to increasing economic uncertainty and monetary policy tightening.”
By keeping these standards strict, the industry is able to prevent what we saw last time, including the risk of widespread foreclosures.
Foreclose Volume Today Is Dramatically Less Than Previous Times
One of the most crucial differences between the housing crisis after the bubble burst and our housing market now is how many homeowners we see facing foreclosure. The strict standards we just mentioned have led to more qualified buyers that are less likely to end up defaulting on their loans. Less loan defaults means less foreclosure activity.
The following graph presents data from ATTOM Data Solutions to make this point clearly:
There’s another significant difference we haven’t mentioned yet. Today, homeowners are equity rich. As we edged closer to the housing bubble and collapse, homeowners seemed to be using their homes like personal ATMs, withdrawing money as soon as equity was built up. Unfortunately, when their home values fell, some owners found the amount they owed on their mortgage to be greater than the actual value of their homes. This is called negative equity.
From there, some homeowners simply walked away from their homes, leading to a surge of distressed property listings, like foreclosures and short sales. These sold at significant discounts, ultimately lowering the value of other homes in the area, too.
“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. . . .”
Seeing homeowners with an average home equity at $207,000 shows us we’re in a much different position from the last time.
What These Graphs Tell Us About The Housing Market Now
Concerned the news on the housing market suggests we’re in for another 2008? The graphs and data we’ve shared today should help to explain how homeowners and lenders are not making the same mistakes as before.