Mortgage rates are up, home prices continue to rise, multiple offers still exist, and bidding wars are still common. This must be a housing bubble, right?

Wrong!

This is a topic I covered a few months ago, but I’ve noticed an increase in “bubble talk” lately along with speculation that a housing crash is on the horizon.

In this blog post, I am going to provide you with 4 reasons why this isn’t a housing bubble and show you why conditions now are very different from what we experienced in the early to mid-2000s.

Watch the following video, or continue reading below, to learn more.

I realize there are some potential homebuyers who have been sitting on the sidelines hoping that home prices will fall once this market starts to cool off, which it will, but I hate to be the bearer of bad news because I just don’t see that happening in the foreseeable future.

This past weekend, I happened to see a report on Yahoo Finance where DLB Financial Services CEO, Debbie Boyd was interviewed about the current market and had the following to say;

Things are’t going back down. We have to quit thinking this is a bubble and start thinking that this is it now. This is the real thing.

Have home prices risen exceptionally fast over the past could of years? They have, but just because home prices have been rising rapidly doesn’t mean we are in a bubble. The truth is the perfect storm of undersupply, high demand, and record-low interest rates created the market that we are currently experiencing, not speculation.

The 4 key areas where the housing market today is nothing like the market in the mid-2000s are Affordability, Mortgage Standards, Foreclosure Activity, and Supply. Here’s a look at each of those areas in more detail.

Affordability

Given the rise in home prices we have experienced, there is no doubt homes are less affordable than they were just a couple of years ago but less affordable doesn’t mean unaffordable.

Affordability is comprised of three components: the price of the home, wages earned by the buyer, and the mortgage rate. According to conventional lending standards, no more than 28% of a buyer’s gross income should be spent on their mortgage payment.

In the mid-2000s, prices were high, wages were low in relation to home prices, and mortgage rates were over 6%. Although prices are high today, wages are higher relative to home prices, and mortgage rates are well below 6%.

In the latest Affordability Report from ATTOM Data, Todd Teta, Chief Product Officer addressed this exact point;

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 upwars.

Here’s a chart comparing affordability now to 2007

Mortgage Standards

It is substantially harder to qualify for a mortgage today than it was during the years leading up to the previous housing market crash. According to credit.org, a credit score between 550-619 is considered to be poor. When looking at those with a credit score below 620 they explain;

Credit agencies consider consumers with credit delinquencies, account rejections, and little credit history as subprime due to their high credit risk.

You might recall that subprime mortgages were the major contributor to the housing market crash. There honestly wasn't much qualifying going on at that time. Literally, fog a mirror, sign your name, and the loan was yours.

While it’s still possible to obtain a loan today with a credit score less than 620, they are much less prevalent as shown on the following graph;

The tighter mortgage standards that have existed since the housing market crash mean that buyers over the last decade have been much better qualified than previously. That’s important and one of the reasons we haven’t seen a flood of new foreclosures as a result of the pandemic.

Foreclosures

While you are bound to read reports that foreclosure filings are way up compared to a year ago, don’t be alarmed! These headlines are more about fear than fact. It’s important to understand that foreclosures happen every year and are a normal part of every real estate market, good or bad. Life happens, people get sick, people inherit homes with mortgages they can’t afford, etc.

As a result of the pandemic, a foreclosure moratorium was put in place. The moratorium expired in the fall of 2021 and foreclosures were once again allowed to proceed. Of course foreclosures are up year-over-year since they couldn’t happen last year. That doesn’t mean we are about to have a foreclosure crisis!

For more information on this check out my February 2022 Housing Market Update where I cover this in more detail.

The Federal Reserve issues a report showing the number of consumers with new foreclosure notices. Here is a graph showing how foreclosure numbers during the crash compare to today;

The 2020 and 2021 numbers were clearly impacted by the forbearance program that was created to help homeowners avoid foreclosure during the uncertainty of the pandemic.

Today, there are less than 800,000 homeowners remaining in forbearance, the majority of which will be able to work out a repayment or modification plan with their bank, but even if all of those homes were foreclosed on we wouldn’t experience anywhere near the number of foreclosures we saw between 2007 and 2010.

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.

Homeowners are Equity Rich

In addition to the forbearance programs which have worked to keep people out of foreclosure, homeowners today are equity rich compared to the years leading up to the housing market crash.

In the early 2000s, some homeowners were using their homes as personal ATM machines. I know of families that were refinancing every year to pull money out, which was spent on boats, vacations, clothes, etc. When the housing market stalled out and prices began to fall, the decline in prices was accelerated by the fact that many homeowners quickly found themselves in a negative equity position. They’d already spent any cushion they had. As a result, many decided to walk away from their homes and strategically default.

Homeowners are savvier this time around and appear to have learned their lesson. The price appreciation over the last several years means that over 40% of homes in the country today has more than 50% equity. National tappable equity has reached a record $9.9 trillion. The average homes equity now stands at $300,000. What happened last time, won’t happen today.

The latest Homeowner Equity Insights report from CoreLogic states;

Not only have equity gains helped homeowners seamlessly transition out of forbearance and avoid a distressed sale, but they’ve also enabled many to continue building their wealth.

Short Supply

In order to have a balanced housing market, approximately six months’ worth of inventory (supply) is needed. Anything more than six months causes home prices to decline and less than six months leads to home price appreciation. The lower the supply, the larger the level of appreciation.

In the mid-2000s we didn’t have a shortage of supply, yet prices were still rising rapidly. There were many things about the housing market then that didn’t make sense. In Southern California, where I was at the time, the frenzy of home buying was mainly centered around new construction. While there were often long lines at new construction developments, or lotteries, when a new phase was released, resale homes weren’t receiving multiple offers or the subject of bidding wars. It was almost like a tale of two markets.

Today, home price appreciation is being impacted by a lack of supply of new construction and resale homes alike. As of this morning in Frisco, there were 73 active homes for sale in a city with over 200,000 residents. Go back a few years and you’ll find there are normally 800 to 900 homes for sale this time of year. New construction is also almost non-existent with only 3 to 4 homes being released at a time to waitlists in the hundreds. Many new builders are telling us they won’t have any additional product available until 2023.

There is currently less than 2 weeks’ worth of inventory in both Frisco and Prosper and all price points are being impacted.

Nationally, here is how supply during the years of the housing crash compares to the last 4 years.

Bottom Line

While the supply issue is going to take some time to work itself out, demand is likely to soften this year due to rising mortgage rates. Don’t let that lead you to believe there will be dramatic changes to the current real estate market though. Instead of every home receiving 20+ offers that number might drop to 5 or 10. Nevertheless, we do expect to see the pace of appreciation slow this year.

While talk of a housing bubble and crash will continue to circulate, hopefully, this information helps demonstrate why the current market is nothing like the market prior to the housing crash of the mid-2000s.

If you have additional questions, or a specific situation you would like to discuss in more detail, please give us a call at 469-296-5230 or email Contact@S2RealEstateTeam.com