With all the headlines and talk in the media about the housing market shifting, you might be wondering if this is a housing bubble. It’s only natural for those thoughts to creep in that make you think it could be a repeat of what took place in 2008. But here’s the good news for you, there’s concrete data to show why this is nothing like the last time.
Nationally there’s Still a Shortage of Homes on the Market Today, Not a Surplus
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 fall dramatically. Supply has increased since the start of this year, but nationally there’s still a shortage of inventory available overall, primarily due to almost 15 years of underbuilding new homes.
The graph below uses data from the National Association of Realtors (NAR) to show how the months’ supply of homes available now compares to the crash. Today, unsold inventory sits at just a 3.2-months’ supply at the current sales pace, which is significantly lower than the last time. There just isn’t enough inventory on the market for home prices to come crashing down like they did last time, even though some overheated markets may experience slight declines due to interest rate increases.
Locally we’re still in a Seller’s Market – there’s Still a Shortage of Homes, not a Surplus
As discussed in last week’s blog post, we are still in a Seller’s Market within the Greater Chattanooga area. The graph below is for the Greater Chattanooga Market area which includes Tennessee Counties of Hamilton and Sequatchie along with Georgia Counties of Catoosa, Dade, and Walker. Again, although the supply of homes for sale has increased, inventory at present is still low overall.
Mortgage Standards Were Much More Relaxed Back Then
During the lead-up to the housing crisis, it was much easier to get a home loan than it is today. Running up to 2006, banks were creating artificial demand by lowering lending standards and making it easy for just about anyone to qualify for a home loan or refinance their current home.
Back then, lending institutions took on greater risk in both the person and the mortgage products offered which led to mass defaults, foreclosures, and falling prices. Today, things are different, and purchasers face much higher standards from mortgage companies.
The graph below uses Mortgage Credit Availability Index (MCAI) data from the Mortgage Bankers Association (MBA) to help tell this story. In that index, the higher the number, the easier it is to get a mortgage. The lower the number, the harder it is. In the latest report, the index fell by 5.4%, indicating standards are tightening.
This graph also shows just how different things are today compared to the spike in credit availability leading up to the crash. Tighter lending standards over the past 14 years have helped prevent a scenario that would lead to a wave of foreclosures like the last time. One such lending standard change was the Dodd-Frank Title XIV – Mortgage Reform and Anti-Predatory Lending Act. According to Cornell University’s Legal Information Institute,
“Title XIV establishes minimum standards for all mortgage products. Creditors may not make a home mortgage loan unless they reasonably determine that the borrower can repay the loan based on the borrower’s credit history, current income, expected income and other factors.”
The Foreclosure Volume Is Nothing Like It Was During the Crash
Another difference is the number of homeowners that were facing foreclosure after the housing bubble burst. Foreclosure activity has been lower since the crash, largely 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 paint the picture of how different things are this time:
Not to mention, homeowners today have options they just didn’t have in the housing crisis when so many people owed more on their mortgages than their homes were worth. Today, many homeowners are equity rich. That equity comes, in large part, from the way home prices have appreciated over time. According to CoreLogic:
“The total average equity per borrower has now reached almost $300,000, the highest in the data series.”
Rick Sharga, Executive VP of Market Intelligence at ATTOM Data, explains the impact this has:
“Very few of the properties entering the foreclosure process have reverted to the lender at the end of the foreclosure. . . . We believe that this may be an indication that borrowers are leveraging their equity and selling their homes rather than risking the loss of their equity in a foreclosure auction.”
Homeowners are in a vastly different position than the last economic downturn. For those facing challenges today, many have the option to use their equity to sell their house and avoid the foreclosure process as why would you give the bank the equity when you can sell and take the cash to help your next move.
Bottom Line
If you’re concerned, we’re making the same mistakes that led to the housing crash, the graphs above should help ease some of your fears. Concrete data and expert insights clearly show why this is nothing like the last time.