4 Simple Graphs Showing Why This Is Not a Housing Bubble

recent survey revealed that many consumers believe a housing bubble is beginning to form. That feeling is understandable, as year-over-year home price appreciation is still double-digit. However, this market is very different from it was during the housing crash 15 years ago.

Here are four key reasons why today is nothing like the last time.

1. Houses Are Not Unaffordable Like They Were During the Housing Boom.

The affordability formula has three components: the price of the home, wages earned by the purchaser, and the mortgage rate available at the time. Conventional lending standards say a purchaser should not spend more than 28% of their gross income on their mortgage payment.

Fifteen 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, even after the recent spike, is still well below 6%. That means the average purchaser today pays less of their monthly income toward their mortgage payment than they did back then.

In the latest Affordability Report by ATTOM Data, Chief Product Officer Todd Teta addresses that exact point:

“The average wage earner can still afford the typical home across the U.S., but the financial comfort zone continues shrinking as home prices keep soaring and mortgage rates tick upward.”

Affordability isn’t as strong as last year, but it’s much better than during the boom. Here’s a chart showing that difference:

Homes More Affordable Today than in 2007 - KM Realty Group LLC, Chicago

How did so many homes sell during the housing boom if costs were so prohibitive?

2. Mortgage Standards Were Much More Relaxed During the Boom.

During the housing bubble, it was much easier to get a mortgage than it is today. For example, let’s review the number of mortgages granted to purchasers with credit scores under 620.

According to credit.org, a credit score between 550-619 is considered poor. In defining those with a score below 620, they explain:

“Credit agencies consider consumers with credit delinquencies, account rejections, and little credit history as subprime borrowers due to their high credit risk.”

Buyers can still qualify for a mortgage with a credit score that low, but they’re considered riskier borrowers.

Here’s a graph showing the mortgage volume issued to purchasers with a credit score less than 620 during the housing boom and the subsequent volume in the 14 years since.

Lending Standards Tighter Since the Crash - KM Realty Group LLC, Chicago

Mortgage standards are nothing like they were the last time. Purchasers that acquired a mortgage over the last decade are much more qualified. Let’s take a look at what that means going forward.

3. The Foreclosure Situation Is Nothing Like It Was During the Crash.

The most obvious difference is the number of homeowners who were facing foreclosure after the housing bubble burst. The Federal Reserve issued a report showing the number of consumers with a new foreclosure notice. Here are the numbers during the crash compared to today:

Foreclosure Situation is Different Now - KM Realty Group LLC, Chicago

Undoubtedly, the 2020 and 2021 numbers are impacted by the forbearance program, which was created to help homeowners facing uncertainty during the pandemic. However, fewer than 800,000 homeowners are left in the program today, and most of them will be able to work out a repayment plan with their banks.

Rick Sharga, Executive Vice President of RealtyTracexplains:

“The fact that foreclosure starts declined despite hundreds of thousands of borrowers exiting the CARES Act mortgage forbearance program over the last few months is very encouraging. It suggests that the ‘forbearance equals foreclosure’ narrative was incorrect.”

Why are there so few foreclosures now? Today, homeowners are equity-rich, not tapped out.

In the run-up to the housing bubble, some homeowners were using their homes as personal ATMs. Many immediately withdrew their equity once it built up.

When home values began to fall, some homeowners found themselves in a negative equity situation where the amount they owed on their mortgage was greater than the value of their home.

Some of those households decided to walk away from their homes, which 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.

Homeowners, however, have learned their lessons. Prices have risen nicely over the last few years, leading to over 40% of homes in the country having more than 50% equity.

But owners have not been tapping into it like the last time, as evidenced by the fact that national taxable equity has increased to a record $9.9 trillion.

With the average home equity now at $300,000, what happened last time won’t happen today.

As the latest Homeowner Equity Insights report from CoreLogic explains:

“Not only have equity gains helped homeowners more seamlessly transition out of forbearance and avoid a distressed sale, but they’ve also enabled many to continue building their wealth.”

There will be nowhere near the same number of foreclosures as we saw during the crash. So, what does that mean for the housing market?

4. We Don’t Have a Surplus of Homes on the Market – We Have a Shortage.

The supply of inventory needed to sustain a normal 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 price appreciation.

As the next graph shows, there were too many Chicago homes for sale from 2007 to 2010 (many of which were short sales and foreclosures), and that caused prices to tumble.

Today, an inventory shortage is causing the acceleration in home values to continue.

Supply of Homes is Nothing Like Last Time - KM Realty Group LLC, Chicago

Inventory is nothing like the last time. Prices are rising because there’s a healthy demand for homeownership. At the same time, there’s a shortage of homes for sale in Chicago, IL.

Bottom Line

If you’re worried that we’re making the same mistakes that led to the housing bubble and subsequent housing crash, the graphs above show data and insights to help alleviate your concerns.

Have more questions? Contact real estate agents in Chicago, IL, at KM Realty Group LLC.