We frequently hear folks compare the market today to that of what we saw in the mid-2000s when home prices crashed and millions of Americans lost their homes. In fact, in a previous survey done by Redfin, 77% of participants in the US housing market believe that there is a bubble.
The reason? At a glance, many of the factors that contributed to the previous crash appear to be happening today. After all, home prices are continuing to climb and the level of appreciation we’ve seen over the past year feels unsustainable.
We've indeed seen an unprecedented increase in appreciation. However, the important thing to keep in mind is that the factors behind the increase in prices are completely different from what we saw in the 2006 housing market.
In this article, we’ll be taking a closer look at the key reasons why we are not in a housing bubble and waiting for a crash might not yield the results that buyers are hoping for.
Reasons Why We’re Not Due For A Crash
There Aren’t Enough Homes
One of the main differences between the housing market in 2006 and what we’re seeing today is the lack of available inventory. UBS strategists Solita Marcelli and Jonathan Woloshin explain, “Existing home months-of-supply - the number of months it would take for the current inventory of homes on the market to sell given the current pace of sales - is near all-time lows across the US. In the case of new homes, supply chain and labor disruptions have increased the cycle to complete homes.”
According to a survey conducted by Discover Home Loans, 79% of homeowners would rather renovate their homes than move. While home prices are continuing to climb, many sellers are hesitant to jump due to the idea of having to buy in such a competitive market.
Another factor to consider is the sheer demand that we’re facing today. Part of that reason is that millennials are entering their prime homebuying years. Additionally, the pandemic has also made remote and hybrid work a reality. This opens up the options of where you can live and releases workers from being bound to an office location. Therefore, there are more opportunities to find that perfect home without being tied to set locations. For many, remote work allowed them to purchase a home in the place they’ve always dreamed of, further adding fuel to the overwhelming demand we’ve been seeing.
Less-Risky Buying Behavior
According to Marcelli and Woloshin, around 40% of mortgages in 2006 were adjustable-rate, compared to around 1% today. Adjustable-rate mortgage payments move higher and lower depending on the macroeconomic environment. What this means is that payments have the potential to rise in a substantial enough way to a point where individuals may no longer be able to afford them. This is not the case with fixed-rate mortgages, where the rate stays the same throughout the mortgage. This is what we typically would see for mortgages in today’s market.
The number of people using an adjustable-rate mortgage was one of the driving factors behind the large number of foreclosures that occurred during the previous housing market crash.
Tighter Lending Standards
One of the major differences between what we saw in the mid-2000s and what we’re seeing today is that the credit standards are much tighter. This means that it’s much more difficult to borrow money today than it was a decade ago.
The problem that we saw 15 years ago was that many purchases were not truly qualified for the mortgage they obtained. Banks were creating artificial demand by lowering credit standards and making it easy for anyone to attain a loan or refinance their home.
This gap in lending standards is depicted in the Mortgage Bankers Association’s Mortgage Credit Availability Index. Below you can see where credit standards stood at the time of the previous housing crash and where they stand today.
Available Equity
In the early 2000s, one strategy that many individuals used to combat rising prices was to borrow against the equity in their homes to finance new cars, boats, and even vacations. However, when prices started to decline, many of those same homeowners ended up underwater, leading them to abandon their homes and increase the number of foreclosures.
Today, we are seeing a different picture. Black Knight reports that the equity available for homeowners to access has more than doubled compared to what we saw in 2006. ATTOM Data Services also revealed that 41.9% of all mortgaged homes have at least 50% in equity. This means that these homeowners will not face the dire situation that we saw in the past if prices dip slightly.
Today we can have confidence knowing even if prices were to drop, we are not going to face a situation where homeowners are forced into foreclosure situations due to the sheer amount of equity that has been built up over the years.
What Should Homebuyers Do In This Market
Chief economist at the National Association of Home Builders explains, “I think you want to be strategic and you want to be patient. Patience is different from waiting for a crash.” When you look at the data, it’s going to be a while before inventory matches up with demand. Experts surveyed by Zillow predict that it will be at least two years before monthly inventory returns to pre-pandemic norms.
But what about interest rates? Won’t the rise in rates deter buyers? Isn’t the combination of interest rates with inflation at 41-year highs going to sink the market? Marcelli and Woloshin say that rising mortgage rates will cool the pace of price appreciation, but home prices aren’t due for a significant drop. This could make life a little bit easier for buyers as the competition is likely to die down and bidding wars should cool off.
If you’re looking to buy, waiting for a crash might not be the best strategy. Instead, be patient and strategic. Rates are still fairly low when you compare them to previous decades and you can still secure a great rate by acting today. To help you find that perfect home, broaden your horizons and weigh in different options, whether that’s a longer commute if you’re only going into an office a few times a week thanks to a hybrid schedule, or looking at new construction if you hadn’t already thought about it.
What Should Homebuyers Do In This Market
While there are factors that point to a slow appreciation and relaxation of demand, waiting for a crash may not be your best bet when it comes to buying a home. While at a glance we might be in a bubble, the fundamentals are there and the reasoning for the steep appreciation we’ve seen over the past couple of years is sound. Instead of waiting for a crash that may not happen, take advantage of slowing competition and get creative with your search. There is an opportunity out there and a knowledgeable agent will be able to help you take advantage of the current market conditions.