When will the housing market crash? It’s a question we receive fairly often. With the crazy amount of demand we’re seeing for homes today, it’s not hard to look back at 2008 and see a similar fate in the future. However, there are many reasons why this is not the case. Today we’ll be focusing on one of those key reasons - lending standards.
Let’s Take a Look Back
One indicator that we like to look at is the mortgage credit availability index (MCAI). This index will tell us how easy (or difficult) it is to get a mortgage at any point in time. The higher the index, the more available mortgage credit is. Let’s take a look back to 2004. At that time, the MCAI stood at about 400. By 2006, that number spiked into the 860s. What followed was the housing crash, and MCAI dropped below 100. Since then, lending standards have eased a bit but today they still hover below 150. When you compare this number to what we saw in 2006, it demonstrates how drastically mortgage credit availability has changed over the years.
What Does Today’s Index Rate Mean For Me?
In 2006, just about anyone could secure a mortgage. Lenders were taking advantage of the housing demand and giving out loans left and right, without any real verification that those individuals would be able to pay off their mortgage. One popular loan option at the time was one in which interest rates slowly increased over time. Due to the lack of vetting, buyers ended up not being able to repay their loans once that interest increased. Since then, the U.S. government has implemented new regulations which have made lending standards much tighter. Investopedia explains that many of those riskier loan types are extremely rare today due to those updated lending practices.
Additionally, your FICO credit score is a huge factor for lenders today. MyFico explains that FICO credit scores are used by 90% of top lenders when determining if you qualify for a loan. According to an article posted by Experian, 28% of consumers with a credit score in the fair range are seriously at risk of becoming delinquent in the future. The fair range consists of scores between 580-669. Today, there are options available for anyone with a credit score of 620 or higher, but you’ll want to work to get that credit score up for a greater variety of loan programs. The graph below from Keeping Current Matters depicts the number of loans granted to those with a credit score less than 620 over the years. Here, you can clearly see that lenders are looking for a higher credit score in order to approve you for a mortgage. According to Ellie Mae’s Original Insight Report, the average FICO score for loans originated in February 2021 was 753.
Bottom Line
Looking at the housing market today, you might think that it’s identical to what we saw in 2006. However, when you look at the lending standards of today vs what we saw then, you’ll see a completely different picture. The risk for lenders and borrowers today is significantly less than what we saw in 2006. Borrowers are having to go through a much stricter evaluation prior to being granted a loan. What this means is that there is significantly less of a risk of delinquency - giving today’s housing market a much better outlook than what we saw in 2006. If you have any questions about today’s lending standards, reach out to us and we’d be happy to connect you with a reputable lender to discuss this further and what it means for you!