THE HOUSING BUBBLE IS OVER
5 Reasons Why We Are Not Heading Toward A Housing Bubble
By Ramilya Siegel, Realtor at Allen Tate Realtors
While the housing market has been consistently growing since 2009 (after the Great Recession and housing crisis of
2008), we will at some point hit a correction. While it looks like a housing bubble may be approaching, it’s simply not the case.
The difference between rising home prices today and the housing bubble of 10 years ago is the economic environment. Banks have been lending more cautiously, and the real estate market has been stable and consistent. When there’s a demand for more housing and not enough supply (available homes for sale), prices go up. So, a reduction in average home prices will be more of a leveling out exercise than entering a housing bubble.
Let’s look at five key metrics to better understand where the housing industry is today.
Home prices have again reached 2006 levels in most U.S. real estate markets. However, based on inflation alone, home prices should be much higher than they are today.
Mortgage Lending Requirements
During the 2008 housing crisis, banks and lenders had been practicing sub-prime lending: allowing people to purchase homes with minimum down payments, low credit scores, high debt-to- income ratios, risky loan programs and unverified income. In addition, banks allowed numerous adjustable rate mortgages (ARMs) and interest-only loans, which created negative equity in the marketplace. In other words, banks let people buy homes they simply could not afford.
While these practices led to a financial meltdown felt across all sectors of the American economy, banks have since tightened mortgage requirements with stricter underwriting standards. Although lending standards are slightly looser than a few years ago, mortgage lending requirements are far more sensible than in the years leading to the Great Recession of 2008. Lenders today require much higher credit scores, much higher down payments and solid documentation of all income sources and amounts, assets and debt.
Interest rates have increased over the past few years. Experts predict that the Federal Reserve will raise interest rates close
to 4.95 percent by the end of 2018. The increased interest rate will help curtail rising home prices and consumer spending, as it won’t be as cheap to borrow money as it was in 2015. Keep in mind that a 4.95 percent interest rate is still historically low when you consider rates over the long term. We’ve been lucky to enjoy an extended period of low interest rates following the 2008 recession. In fact, the average interest rate over the past 30 years is 7 percent.
One of biggest contributing factors to the 2008 housing crisis was the huge number of home foreclosures. With little to no down payments required and already low credit scores, homeowners had no “skin in the game” to hold onto their homes. It was too easy to walk away. The influx of foreclosed homes increased the supply of available homes, thus driving home values down by 20–50 percent. According to the Federal Reserve’s most recent Household Debt and Credit Report, today’s housing market includes approximately 76,000 foreclosed homes, compared to 203,320 in 2003 and 566,180 in 2009. That’s 40 percent fewer foreclosed homes on the market!
Home affordability is far better now than prior to the last housing boom. While the price of a home may be higher, the actual cost to own and maintain a home is much lower. According to CoreLogic, “The main reason the typical mortgage payment remains well below record levels in most of the country is that the average mortgage rate back in June 2006, when the U.S. typical mortgage payment peaked, was about 6.7 percent, compared with an average mortgage rate of about 4.4 percent in March 2018.”
The Real Truth
After reviewing these five key metrics, today’s housing market is nothing at all like before the Great Recession of 2008. Our
banks and the housing market are better equipped to deal with pending matters. If you have any questions about the housing market, selling your home or buying a home, I am always available to help.
Please contact me at 336-215-9856 or email@example.com for more information.