The U.S. housing market is on fire. Bidding wars and skyrocketing prices are leading to fears that homeownership – a decades-long staple of the “American Dream” – is becoming out of reach for millions of Americans.
The last time the U.S. housing market was booming like this was back in 2005 to 2007…until home values crashed in 2008 with disastrous consequences. When that real estate bubble burst, the global economy plunged into the deepest recession since the Great Depression.
However, in nearly every meaningful way, today’s market is the opposite of the previous housing bubble.
What Led to the Last Housing Crash?
In the mid-2000s, loose mortgage-lending standards enabled borrowers with poor credit histories to purchase homes beyond their means, sometimes with mortgages that required low payments in the early years of the loan. Too much new construction led to an oversupply of houses. Financial firms packaged these risky mortgages as securities and sold them to investors. When more homeowners started defaulting on their mortgages, lenders suffered large losses and the entire financial system froze up.
Many homeowners paid a big price. Between 2006 and 2014, about 9.3 million households went through foreclosure, gave up their home to a lender or sold in a distressed sale, according to a 2015 estimate from the National Association of Realtors.
Why Is Today’s Housing Boom Different?
The current housing boom is far more stable than the last one and poses fewer risks. Here are some reasons why experts believe another housing crash is not on the horizon:
1. Inventories are at record lows:
The National Association of Realtors says there was just a 2.1-month supply of homes for sale, up marginally from February’s 2.0-month supply. That explains why buyers have little choice but to bid up prices. And it also indicates that the supply-and-demand equation simply won’t allow a price crash in the near future.
2. Builders can’t build quickly enough to meet demand
Homebuilders pulled way back after the last crash, and they never fully ramped up to pre-2007 levels. Now, there’s no way for them to buy land and win regulatory approvals quickly enough to quench demand. While builders are building as much as they can, a repeat of the overbuilding of 15 years ago looks unlikely.
3. Mortgage rates remain near historic lows
After hitting all-time lows in January, mortgage rates have risen a bit — but not much.
Low rates give home shoppers increased buying power. The Mortgage Bankers Association expects rates to rise to 3.7 percent by the end of 2021. That would crimp refinancing, but not homebuying. “We don’t think it’s going to move high enough to have an impact on purchase borrowers,” says Mike Fratantoni, the group’s chief economist.
4. Demographic trends are creating new buyers
There’s strong demand for homes on many fronts. Many Americans who already owned homes decided during the pandemic that they needed bigger places. Millennials are a huge group and in their prime buying years. And Hispanics are a young, growing demographic keen on homeownership.
5. Lending standards remain strict
In 2007, “liar loans,” when borrowers didn’t need to document income, were common. Lenders offered mortgages to just about anyone, regardless of credit history or down payment size. Today, lenders impose tough standards on borrowers — and those who are getting mortgages overwhelmingly have stellar credit. The typical credit score for mortgage borrowers in the third and fourth quarters stood at a record high 786, the Federal Reserve Bank of New York says.
6. Foreclosure activity is muted
In the years after the housing crash, millions of foreclosures flooded the housing market, depressing prices. That’s not the case now. Most homeowners have a comfortable equity cushion in their homes. Lenders haven’t been filing default notices during the pandemic, pushing foreclosures to record lows in 2020.
Sources: bankrate.com, keepingcurrentmatters.com
Yes, home prices are pushing the bounds of affordability, but this current housing boom should not end in a bust thanks to strict mortgage lending standards and strong demand.