Home prices have experienced significant year-over-year price appreciation, particularly since the lows of the pandemic. In fact, The National Association of Realtors reported that two-thirds of Metro areas reached double-digit appreciation in the fourth quarter of 2021.
Strong price appreciation and stories of homes selling in hours have many consumers worried a housing bubble is beginning to form. We have seen competition increase first-hand in our market, and know that you do not want to be a homebuyer without a Broker in today’s market.
Today’s market is, however, vastly different than the housing market of 15 years ago that lead to the crash of 2007. Here are 5 key reasons why today’s market is not like the previous one.
Stricter Lending Standards:
Lenders are much stricter with loan originations today than compared to 2006/2007. Lenders need to follow strict guidelines in order to qualify a borrow.
That means today’s buyers are highly qualified. Additionally, many lenders were packing up risky loans that masked the true cost of monthly payments or included large balloon payments.
We do not see that occurring today. Riskier products such as Adjustable Rate Mortgages (ARMs) account for only 5% of mortgages today compared to nearly 35% at the peak of 2006.
Foreclosures at Record Lows:
Extremely large numbers of homeowners facing foreclosure was the hallmark of the 2007 crash. Today, we are seeing the opposite with foreclosures at record lows. Homeowners have experienced large equity gains in recent years and many are sitting at a large equity surplus as a result. Additionally, many are not tapping into this equity and pulling it out of their homes like they were a decade ago.
In their Homeowner Equity Report, CoreLogic CEO Frank Martell stated:
“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.”
According to the report, only 3% of mortgaged properties were in a negative equity position at the end of Q3 2021, a decrease of 28.9% from the year prior.
Homeowners are equity rich today, with many have a large equity surplus on their property
There is a Supply Shortage, Not Surplus:
Basic market fundamentals say that an excess of supply depresses prices will a shortage of supply will drive prices up. In many areas around the country, we are experiencing a shortage a property which is leading to continued price appreciation.
The inventory picture today is much different than before. There is a healthy demand for homeownership, which is expected to continue for the foreseeable future, coupled with a shortage of supply that is drive appreciation.
Strong Job Market:
Coming out of the pandemic, the United States economy is much stronger than it was over a decade ago. We are currently in one of the strongest labor markets – any job seeker knows that the time to find a new gig is now.
Employers are looking to hire workers, and they are paying them. Wages have also been rising – the buying power of many households is significantly higher today compared to 2006.
A strong job market with rising wages is the backdrop for consumers to have the ability to pay for home purchases they finance.
Today’s job market is strong with Employers looking to hire workers. Wages are also on the rise
Interest Rates are Rising, but Still Low:
Yes, interest rates are on the rise and Mortgage Rates have gone up recently as a result. Even with the recent upward move in rates, 30-year mortgages are around 4%. In 2006 Mortgage Rates were over 6%.
By that mark, rates are still low making homes more affordable for Buyers today compared to over a decade ago. Coupled with rising wages referenced above, purchasing power is stronger today.
Additionally, one benefit of rising rates is that they function as a check on demand. For those concerned about a bubble, this is a positive as demand translates to pricing influence as mentioned previously. Rising Rates may help to keep prices from running away. On the flip side, it is worth noting that rates would have to rising by a very large amount to halt Buyer demand and cause prices to collapse.