This Is NOT Like the Last Time: Proved by Five Simple Graphs
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With all of the volatility in the stock market and uncertainty about the Coronavirus (COVID-19), some are concerned we may be moving towards 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 several 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 time of 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 displayed below, during the housing bubble, the index skyrocketed. Currently, the index shows how getting a mortgage is even more challenging than it was before the bubble.
2. Prices are not soaring out of control.
Below is a graph exhibiting 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 is a stark difference between these two periods of time. Normal appreciation is 3.6%, so while present appreciation is higher than the historic norm, it is 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 regular real estate market is approximately six months. Anything more than that is an overabundance and will cause prices to depreciate. Anything less than that is a shortage and will lead to continued appreciation. As the next graph displays, there were too many homes for sale in 2007, and that caused prices to tumble. Today, there is a shortage of inventory which is causing an acceleration in home values.
4. Houses became too expensive to buy.
The affordability formula has three factors: 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 is 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 climbed nicely over the last few years, leading to over fifty percent of homes in the country having greater than fifty percent equity. But owners have not been tapping into it like the last time. Here is a table comparing the equity withdrawal over the past 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 decline, 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 enormous discounts, thus lowering the value of other homes in the area. That can not happen today.
If you are concerned we are making the same mistakes that led to the housing crash, take a look at the charts and graphs above to help lesson your fears.