3 Graphs To Show This Isn’t a Housing Bubble

It’s only natural to feel concerned when you hear about a housing bubble in the news. After all, no one wants to go through another market crash like we saw in 2008. However, there is concrete data to show that this time is different and there’s not as much to worry about this time.

There’s a Shortage of Homes on the Market Today, Not a Surplus and That keeps prices up

There are approximately six months’ worth of inventory in a typical real estate market. Anything more than that is an overabundance, and it will cause prices to depreciate. Anything less than that is a scarcity and results in price appreciation continuing. There were too many houses for sale during the housing crisis (many of which were short sales and foreclosures), and this caused prices to fall. Supply is increasing, but there isn’t enough inventory accessible today.

Inventory is low because of underbuilding and millennial demand. This combination puts pressure on home prices, meaning they are unlikely to fall in the near future.

Mortgage standards were way more lenient during the economic crash.

It was far easier to obtain a home loan prior to the housing crisis than it is now. The following graph shows data from the Mortgage Credit Availability Index (MCAI) released by the Mortgage Bankers Association (MBA). The higher the number, the simpler it is to get a mortgage.

In the years leading up to 2006, banks were artificially boosting demand by making it easy for anyone to qualify for a home loan or refinance. Lending standards were lowered, and institutions took on greater risk in both the person and mortgage products offered. This led to mass defaults, foreclosures, and falling prices.

Today, things are different. Purchasers face much higher standards from lenders, and Mark Fleming, Chief Economist at First American says:

“Credit standards tightened in recent months due to increasing economic uncertainty and monetary policy tightening.” 

Stricter standards, like there are today, help prevent a risk of a rash of foreclosures like there was last time.

The Foreclosure Volume Is Completely Different Than It Was During the Crisis

The number of homeowners that were in danger of going into foreclosure after the housing bubble burst is the most apparent change. Since the crash, foreclosure activity has been on a steady decline since buyers today are more qualified and less likely to default on their loans. The graph below uses data from ATTOM Data Solutions to help tell the story:

Today’s homeowners are far from tapped out of their homes’ equity. Some homeowners used their properties as personal ATMs in the years preceding the housing bubble. When house values began to drop, certain individuals found themselves in a negative equity situation, with their mortgage debt exceeding the value of their property.

Many of those homeowners chose to abandon their homes, creating a market for distressed properties (foreclosures and short sales) at significant discounts. The result was that home values in the area decreased overall.

Today, prices have risen nicely over the last few years, and that’s given homeowners an equity boost. According to Black Knight:

“In total, mortgage holders gained $2.8 trillion in tappable equity over the past 12 months – a 34% increase that equates to more than $207,000 in equity available per borrower. . . .”

Homeowners are in a different situation now than they were two years ago, when the average equity was $200,000.

Bottom Line

The graphs above should allay any fears you may have that we’re making the same blunders that caused the housing crisis. The facts and expert opinions presented in this paper make it clear why this is nothing like the last time. If you have more concerns please reach out to us!