5 Simple Graphs Proving This Is NOT Like the Last Time
Dusty Rhodes • March 30, 2020
With all of the volatility in the stock market and uncertainty about the Coronavirus (COVID-19), some are concerned we may be headed for 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 many 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 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 shown below, during the housing bubble, the index skyrocketed. Currently, the index shows how getting a mortgage is even more difficult than it was before the bubble.
2. Prices are not soaring out of control.
Below is a graph showing 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’s a stark difference between these two periods of time. Normal appreciation is 3.6%, so while current appreciation is higher than the historic norm, it’s certainly not accelerating beyond control as it did in the early 2000's.
The months’ supply of inventory needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued appreciation. As the next graph shows, there were too many homes for sale in 2007, and that caused prices to tumble. Today, there’s a shortage of inventory which is causing an acceleration in home values.
4. Houses became too expensive to buy.
The affordability formula has three components: 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’s 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 risen nicely over the last few years, leading to over fifty percent of homes in the country having greater than 50% equity. But owners have not been tapping into it like the last time. Here is a table comparing the equity withdrawal over the last 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 fall, 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 huge discounts, thus lowering the value of other homes in the area. That can’t happen today.
Bottom Line
If you’re concerned we’re making the same mistakes that led to the housing crash, take a look at the charts and graphs above to help alleviate your fears.
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NAR says introducing competition into the credit scoring process has the potential to lower costs, improve efficiency and open the door to more qualified home buyers. The Federal Housing Finance Agency, Fannie Mae and Freddie Mac are moving forward with updated credit scoring models for all forms of mortgage lending. The announcement was made by Federal Housing Finance Agency Director William J. Pulte. The FHA followed suit announcing it would accept Vantagescore and a new FICO score beginning in 2027. The move builds on Pulte’s announcement last year that Fannie Mae and Freddie Mac would begin testing VantageScore 4.0 as part of the mortgage underwriting process. The National Association of REALTORS® welcomed the change, saying a more modern approach to evaluating credit could broaden access to mortgage financing. The updated models may be particularly helpful for consumers with limited traditional credit histories, giving more prospective buyers an opportunity to qualify for a mortgage. “The Federal Housing Finance Agency’s announcement marks an important step forward in modernizing the mortgage marketplace,” says NAR Executive Vice President and Chief Advocacy Officer Shannon McGahn. “For years, the National Association of REALTORS® has advocated for a more competitive and innovative credit scoring system, one that better reflects how consumers manage their financial lives today.” VantageScore 4.0 was created by Equifax, Experian and TransUnion and is designed to evaluate credit behavior over time. The model can also incorporate certain payment information that has historically received less consideration in credit scoring, including rental, utility and telecommunications payments. Consumers who consistently make those payments on time could benefit from having that information reflected in their credit profiles. The Fair Isaac Corporation, commonly known as FICO, is working to implement its own modern score. “Introducing competition into the credit scoring process has the potential to lower costs, improve efficiency and open the door to qualified borrowers who may have been overlooked under older models,” McGahn says. “By allowing multiple credit scoring models that consider rent, utility and other payment histories, this policy can provide a fuller picture of a borrower’s creditworthiness and open the door to homeownership for more Americans.” NAR says the availability of additional credit scoring models could increase competition within the credit reporting industry while potentially improving accuracy and reducing costs. NAR will also continue to monitor the mortgage market and the experiences of lenders and consumers as these models are implemented to help ensure they are working as intended. This includes evaluating how the models affect access to credit, accuracy and consistency in mortgage underwriting and the broader homeownership market. For more information, visit fhfa.gov/policy/credit-scores.
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