Why Today’s Housing Market Isn’t a Bubble Waiting to Pop

blue house on tree lined street, today's housing market

Homeownership has become a major element in achieving the American Dream. And despite the volatility of today’s housing market, a recent report from the National Association of Realtors (NAR) finds that over 86% of buyers agree homeownership is still the American Dream.

Prior to the 1950s, less than half of the country owned their own home. However, after World War II, many returning veterans used the benefits afforded by the GI Bill to purchase a home. Since then, the percentage of homeowners throughout the country has increased to the current rate of 65.5%.

That strong desire for homeownership has kept home values appreciating ever since. The graph below tracks home price appreciation since the end of World War II:

Why This Housing Market Is Not a Bubble Ready To Pop | Keeping Current Matters

The graph shows the only time home values dropped significantly was during the housing boom and bust of 2006-2008. If you look at how prices spiked prior to 2006, it looks a bit like the current spike in prices over the past two years. That may lead some people to be concerned we’re about to see a similar fall in home values as we did when the bubble burst.

To help alleviate those worries, let’s look at what happened last time and how that’s different from what is happening today.

Historic Foreclosures

Back in 2006, foreclosures flooded the market, driving down home values dramatically.

The two main reasons for the flood of foreclosures were:

  • Many purchasers were not truly qualified for the mortgage they obtained, which led to more homes turning into foreclosures.
  • A number of homeowners cashed in the equity on their homes. When prices dropped, they found themselves in a home that was worth less than the mortgage on the house. Many of these homeowners walked away from their homes, leading to more foreclosures. Thus, lowering neighboring home values even more. This cycle continued for years.

Today’s Housing Market Reality

Demand for Homeownership Is Real (Not Artificially Generated)

Running up to 2006, banks created artificial demand by lowering lending standards. This made it easy for just about anyone to qualify for a home loan or refinance their current home. Today, purchasers and those refinancing a home, face much higher standards from mortgage companies.

Data from the Urban Institute shows the amount of risk banks were willing to take on then as compared to now.

Why This Housing Market Is Not a Bubble Ready To Pop | Keeping Current Matters

There’s always risk when a bank loans money. 15 years ago, lending institutions took on much greater risks in both the person and the mortgage product offered.

That led to mass defaults, foreclosures, and falling prices.

Today, the demand for homeownership is real. It’s generated by a re-evaluation of the importance of home due to a worldwide pandemic. Additionally, lending standards are much stricter in the current lending environment. Purchasers can afford the mortgage they’re taking on, so there’s little concern about possible defaults.

People No Longer Treat Their Homes Like ATMs

As mentioned above, when prices rapidly escalated in the early 2000s, many thought it would never end. They started to borrow against the equity in their homes to finance new cars, boats, and vacations. When prices started to fall, many of these homeowners were left underwater. This lead some to abandon their homes, which increased the number of foreclosures.

Homeowners didn’t forget the lessons of the crash as prices skyrocketed over the last few years. Black Knight reports that tappable equity (the amount of equity available for homeowners to access before hitting a maximum 80% loan-to-value ratio, or LTV) has more than doubled compared to 2006 ($4.6 trillion to $9.9 trillion).

The latest Homeowner Equity Insights report from CoreLogic reveals that the average homeowner gained $55,300 in home equity over the past year alone. 

The major reason for the housing crash 15 years ago was a tsunami of foreclosures. With much stricter mortgage standards and a historic level of homeowner equity, the fear of massive foreclosures impacting today’s market is not realistic.

In order to ensure you’re making the smartest financial decisions for your homeownership journey, contact the Ultimate Lending Team. We’d be happy to get you home, safely.

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