With all of the volatility in the stock market and uncertainty about the Coronavirus (COVID-19), some are concerned we may be headed for another housing crash like the one we experienced from 2006-2008. The feeling is understandable. Ali Wolf, Director of Economic Research at the real estate consulting firm Meyers Research, addressed this point in a recent interview:
“With people having PTSD from the last time, they’re still afraid of buying at the wrong time.”
There are many reasons, however, indicating this real estate market is nothing like 2008. Here are five visuals to show the dramatic differences.
1. Mortgage standards are nothing like they were back then.
During the housing bubble, it was difficult NOT to get a mortgage. Today, it is tough to qualify. The Mortgage Bankers’ Association releases a Mortgage Credit Availability Index which is “a summary measure which indicates the availability of mortgage credit at a point in time.” The higher the index, the easier it is to get a mortgage. As shown below, during the housing bubble, the index skyrocketed. Currently, the index shows how getting a mortgage is even more difficult than it was before the bubble.
2. Prices are not soaring out of control.
Below is a graph showing annual house appreciation over the past six years, compared to the six years leading up to the height of the housing bubble. Though price appreciation has been quite strong recently, it is nowhere near the rise in prices that preceded the crash.
There’s a stark difference between these two periods of time. Normal appreciation is 3.6%, so while current appreciation is higher than the historic norm, it’s certainly not accelerating beyond control as it did in the early 2000s.
There’s a stark difference between these two periods of time. Normal appreciation is 3.6%, so while current appreciation is higher than the historic norm, it’s certainly not accelerating beyond control as it did in the early 2000s.3. We don’t have a surplus of homes on the market. We have a shortage.
The months’ supply of inventory needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued appreciation. As the next graph shows, there were too many homes for sale in 2007, and that caused prices to tumble. Today, there’s a shortage of inventory which is causing an acceleration in home values.
4. Houses became too expensive to buy.
The affordability formula has three components: the price of the home, the wages earned by the purchaser, and the mortgage rate available at the time. Fourteen years ago, prices were high, wages were low, and mortgage rates were over 6%. Today, prices are still high. Wages, however, have increased and the mortgage rate is about 3.5%. That means the average family pays less of their monthly income toward their mortgage payment than they did back then. Here’s a graph showing that difference:
5. People are equity rich, not tapped out.
In the run-up to the housing bubble, homeowners were using their homes as a personal ATM machine. Many immediately withdrew their equity once it built up, and they learned their lesson in the process. Prices have risen nicely over the last few years, leading to over fifty percent of homes in the country having greater than 50% equity. But owners have not been tapping into it like the last time. Here is a table comparing the equity withdrawal over the last three years compared to 2005, 2006, and 2007. Homeowners have cashed out over $500 billion dollars less than before:
During the crash, home values began to fall, and sellers found themselves in a negative equity situation (where the amount of the mortgage they owned was greater than the value of their home). Some decided to walk away from their homes, and that led to a rash of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of other homes in the area. That can’t happen today.
During the crash, home values began to fall, and sellers found themselves in a negative equity situation (where the amount of the mortgage they owned was greater than the value of their home). Some decided to walk away from their homes, and that led to a rash of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of other homes in the area. That can’t happen today.Bottom Line
If you’re concerned we’re making the same mistakes that led to the housing crash, take a look at the charts and graphs above to help alleviate your fears.
Coronavirus & the U.S. Housing Market
The Coronavirus (COVID-19) has caused massive global uncertainty, including a U.S. stock market correction no one could have seen coming.
While much of the news has been about the effect on various markets, let’s also acknowledge the true impact it continues to have on lives and families around the world.
With all this uncertainty, how do your clients make powerful and confident decisions in regard to their real estate plans?
Read more on KCM and visit NAR’s Coronavirus guide for more further information.
MARCH 5, 2020
Impact of the Coronavirus on the U.S. Housing Market
The Coronavirus (COVID-19) has caused massive global uncertainty, including a U.S. stock market correction no one could have seen coming.
Don’t panic. Last week’s stock market correction caused a lot of concern.
Here’s what we know:
1. In the last 5 virus outbreaks, the stock market reacted.
2. After the reactions, the market returned.
3. A stock market correction does not = housing crisis.
This isn’t a time to panic. Know the facts.
Here’s what we know:
1. In the last 5 virus outbreaks, the stock market reacted.
2. After the reactions, the market returned.
3. A stock market correction does not = housing crisis.
This isn’t a time to panic. Know the facts.
How Global Uncertainty Impacts the Housing Market
Some worry this could cause concern for the U.S. housing market. The uncertainty, however, may actually mean good news for real estate. As Fleming concluded in his report:
“Amid uncertainty, the house-buying power of U.S. consumers can benefit significantly.”
FEBRUARY 13, 2020
How the Housing Market Benefits with Uncertainty in the World
It’s hard to listen to today’s news without hearing about the uncertainty surrounding global markets, the spread of the coronavirus, and tensions in the Middle East, just to name a few. These concerns have caused some to question their investment plans going forward.
When there’s fear in the world, we see lower mortgage interest rates as investors flee stocks for the safety of U.S. bonds.
Be sure to keep this in mind when making real estate decisions!
What’s Happening with Interest Rates?
When there’s fear in the world, we see lower mortgage interest rates as investors flee stocks for the safety of U.S. bonds. This connection should be considered when making real estate decisions.
According to the National Association of Home Builders (NAHB):
“The Fed’s action was expected but perhaps not to this degree and timing. And the policy change was consistent with recent declines for interest rates in the bond market. These declines should push mortgage interest rates closer to a low 3% average for the 30-year fixed rate mortgage.”
This is exactly what we’re experiencing right now as mortgage interest rates hover at the lowest levels in the history of the housing market.
Mortgage interest rates are currently at a historic five-decade low!
The impact your interest rate has on your monthly mortgage payment is significant…
Maybe it’s time to lock in now while rates are still low!
How Has the Housing Market Responded to Past Recessions?
There is plenty of talk in the media about a pending economic slowdown.
Many experts predict a potential recession is on the horizon. However, housing will not be the trigger, and home values will still continue to appreciate. It will not be a repeat of the crash in the 2008 housing market.
The good news is, home values actually increased in 3 of the last 5 U.S. recessions, and decreased by less than 2% in the 4th.
![A Recession Does Not Equal a Housing Crisis [INFOGRAPHIC] | Keeping Current Matters](https://files.keepingcurrentmatters.com/wp-content/uploads/2019/08/29061215/20190830-NM-824x1030.jpg "A Recession Does Not Equal a Housing Crisis [INFOGRAPHIC] | Keeping Current Matters")
Many experts predict a potential recession is on the horizon…
However, housing will NOT be the trigger and this will NOT be a repeat of the 2008 crash!
In fact, home values will still continue to appreciate!
If you have any questions, please reach out to me and we can discuss.
The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Keeping Current Matters, Inc. does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Keeping Current Matters, Inc. will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.
- TOPIC: Home Selling
- LOCATION:
- California Ventura County
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