According to a recent survey, many consumers believe that a housing bubble is forming. That sentiment is understandable, given that home price appreciation is still in the double digits year over year. This market, however, is not the same as it was 15 years ago when the housing market crashed. Here are four major reasons why Team Alpha Charlie thinks 2022 is going to be better.
1| Homes Prices are Rising, Affordability is Steady
The home’s price, the buyer’s wages, and the mortgage rate available at the time are all factors in the affordability formula. According to traditional lending guidelines, a buyer’s mortgage payment should not exceed 28 percent of their gross income.
Prices were high, wages were low, and mortgage rates were over 6% fifteen years ago. Prices are still high today. Wages, on the other hand, have risen, and the mortgage rate is still well below 6%, even after the recent spike. That means today’s average buyer contributes a lower percentage of their monthly income to their mortgage payment than they did in the past.
In a recent Affordability Report by ATTOM Data, Chief Product Officer Todd Teta addresses this:
“The average wage earner can still afford the typical home across the U.S., but the financial comfort zone continues shrinking as home prices keep soaring and mortgage rates tick upward.”
Here’s the chart showing the difference:
So why did so many home sell if prices were prohibitive?
2| Mortgage Standards Used To Be More Relaxed
Getting a mortgage was much easier during the housing bubble than it is now. Take, for example, the number of mortgages granted to buyers with credit scores below 620. A credit score of 550-619 is considered poor, according to credit.org. They explain:
“Credit agencies consider consumers with credit delinquencies, account rejections, and little credit history as subprime borrowers due to their high credit risk.”
With a credit score that low, buyers can still get a mortgage, but they’re considered riskier borrowers. This graph depicts the volume of mortgages issued to buyers with a credit score of less than 620 during the housing boom, as well as the volume issued in the 14 years since.
The mortgage standards are not the same as they were a few years ago. Purchasers who took out a mortgage in the last ten years are far more qualified. Let’s look at what the implications of this are.
3| The Foreclosure Landscape is Completely Different in 2022
The number of homeowners facing foreclosure following the burst of the housing bubble is the most obvious difference. The Federal Reserve releases a report that shows the number of people who have received a new foreclosure notice. Here are the numbers from the time of the crash versus today:
The forbearance program, which was created to assist homeowners facing uncertainty during the pandemic, undoubtedly has an impact on the 2020 and 2021 numbers. However, only about 800,000 homeowners remain in the program today. The majority of them will be able to work with their lenders on a repayment plan.
Rick Sharga, Executive Vice President of RealtyTrac, explains:
“The fact that foreclosure starts declined despite hundreds of thousands of borrowers exiting the CARES Act mortgage forbearance program over the last few months is very encouraging. It suggests that the ‘forbearance equals foreclosure’ narrative was incorrect.”
Why aren’t there as many foreclosures as there used to be? Homeowners today have a lot of equity and aren’t in debt.
Some homeowners were using their homes as if they were personal ATM machines in the run-up to the housing bubble. Once their equity had grown, many people withdrew it right away. When home values began to fall, some homeowners found themselves in a negative equity situation, where their mortgage debt was greater than their home’s value. Some of those families chose to leave their homes, resulting in a flood of foreclosures and short sales that sold at steep discounts, lowering the value of other homes in the neighborhood.
Homeowners, on the other hand, have learned from their mistakes. Over the last few years, prices have risen nicely, resulting in over 40 percent of homes in the country having more than 50% equity. Owners, on the other hand, haven’t been tapping into it as much as they used to, as evidenced by the national tappable equity has reached a new high of $9.9 trillion. What happened last time won’t happen this time, as the average home equity now at $300,000.
According to CoreLogic’s latest Homeowner Equity Insights report:
“Not only have equity gains helped homeowners more seamlessly transition out of forbearance and avoid a distressed sale, but they’ve also enabled many to continue building their wealth.”
There will be nowhere near as many foreclosures as there were during the financial crisis. So, what does this suggest for the real estate market?
4| The Previous Market Was Had Supply Surplus, 2022 Has A Shortage
A six-month supply of inventory is required to maintain a normal real estate market. Anything more than that is an overabundance, and prices will depreciate as a result. Anything less than that indicates a scarcity, which will result in continued price increases. This is how supply and demand works.
From 2007 to 2010, there were an excessive number of homes for sale (many of which were short sales and foreclosures), causing prices to plummet. Today, there is a scarcity of inventory, which is causing home values to continue to rise.
Inventory isn’t the same as it was before. Prices are rising as a result of a healthy demand for homeownership combined with a scarcity of available homes.
What’s It All Mean
All this to say, don’t worry. We are not in a bubble, and without a bubble, it can’t burst.
Feeling a little better about the housing market? Want more information? Team Alpha Charlie is here for you. Get in touch or check out some of our other articles. We look forward to it!