Are We Headed Toward a Housing Market Crash?

Hello Blog! It’s a been a little while since I last posted, but as I’m sure most people can relate, life happens, and so here we are.

For this post I want to address a concern I’ve heard a number of people bring up. Are we headed toward another housing market crash?

If you’re unclear what I’m referring to: I’m talking about the market crash in 2008. There were a ton of defaults on mortgage-backed homes due to a drop in home values and many people were finding themselves in a situation where they owed more than they owned. Too many unqualified borrowers were approved for loans, values plummeted, homes foreclosed, and banks went bankrupt – a bad time for many people.

With today’s buying frenzy, people are concerned we’re headed toward a similar situation.

Well, in an attempt to ease some justified concern, the short answer is no, we are not. And here are several reasons why experts confidently believe this hot market will NOT land us back in a housing crisis.

1. Mortgage standards are much higher.

It was incredibly easy to get a loan in the years leading up to 2008. Today, and in the last 10 years, lenders have imposed much tighter lending standards, ensuring that people who do get pre-approved are very capable to make their monthly payments. The HCAI (Housing Credit Availability Index) is a way to measure the percentage of owner-occupied homes that are likely to default. We are at a much lower HCAI than we were in the 2000’s, which is further evidence of lenders more stringent requirements.

“If the current default risk was doubled across all channels, risk would still be well within the pre-crisis standard of 12.5 percent from 2001 to 2003 for the whole mortgage market.”

2. Prices Are Increasing at a Manageable Rate.

Ok, I know this might come as a surprise to you. Especially when you’re seeing homes go 30% over list price. BUT in comparison to the overall price appreciation that we were seeing in 2003-2005 preceding the crash, this time around we are not accelerating out of control.

3. Inventory is Low.

My determined buyers have been forced to learn patience. Inventory levels are incredibly LOW. As frustrating as that is when you’re ready to buy a house, it’s regulating the amount of home ownership. Back in 2006-2007, we were seeing a surplus of inventory, a true buyers market. And what happens when there is more supply than demand? Depreciation.

The shortage of inventory in today’s market is driving the appreciation in home values. And the demand remains high. In the Seattle market we are currently at 0.5 months of inventory, and in 2008 we were seeing a whopping 9 months of inventory.

4. New Construction is Below Average.

In years leading up to the crash, there were 4 straight years of an overabundance and record-setting number of new construction. Since 2008, we’ve been consistently under the 50-year average of new construction units. Another example if low inventory levels.

5. Wages and Interest Rates are Supporting Home Prices.

Houses aren’t inexpensive, especially if you’re looking in the Seattle area. However, the rise in houses are being supported by the rise in wages and the lower interest rates.

15 years ago, prices were high, but interest rates were over 6% (they’re around 3% now), and incomes were low, so a large percentage of monthly wages went to paying the mortgage, which is very difficult to sustain. This is now a large factor that regulates your loan amount.

“Looking back at the bubble years, house prices exceeded house-buying power in 2006, but today house-buying power is nearly twice as high as the median sale price nationally.”

6. People Have More Equity

And finally, over 50% of homes in the country have more than 50% equity in their homes. Last time, people would immediately borrow against their equity as soon as they had some, and when home values began to fall, people found themselves in a negative equity situation. This led to a surge in foreclosure and short sales when people were no longer able to pay their mortgages.

Current homeowners have cashed out almost $500 billion dollars less than before.

So, all in all, there are some very significant differences between today’s market and the 2008 crash. There is reason to be cautious, and it’s always a good idea to consult professionals if you are thinking about making a large investment, or cashing out. But we’re in a much more stable position than before. Get out there and start building your net worth! Reach out with questions.

…See you next time!