I sometimes wonder with so little stock extracted from this cycle if it’s still early days for the housing market. At least regarding the upcoming collapse.
To be sure, the volume of home sales has declined due to unsustainable conditions, driven by rising home prices and skyrocketing mortgage rates.
But do we still need a flood of HELOCs and cash before the market inevitably heats up again?
Otherwise it’s just an unaffordable market that will likely become more affordable as mortgage rates fall, house prices stall, and wages rise.
Where’s the fun in that?
Homeowners hit a ceiling in the early 2000s
If you look at mortgage debt outstanding today, it hasn’t risen much over the past 16 years or so when the housing bubble burst.
They skyrocketed in the early 2000s, thanks to rapidly rising home prices and zero-sum financing.
And a flood of cash-out refinances reaching 100% LTV and beyond (125% financing anyone?).
Basically, homeowners and homebuyers at the time were borrowing every penny they could, and then some.
They either cashed out every six months based on higher appraisals, driven by shoddy home appraisals, or took out a HELOC or home equity loan for their first mortgage.
Many of them also buy investment properties without paying any money, and even without any documents.
Whatever the case, homebuyers at that time always exceeded their borrowing capacity.
It was kind of a movement at the time. Your loan officer or mortgage broker will tell you how much you can afford and you will get the maximum amount from that. There was no reason to back down.
If it is not affordable, the income mentioned above will be mentioned to make it a pencil.
This was further exacerbated by false home appraisals that allowed property values to go higher and higher.
Of course, it wasn’t long before the bubble burst, and we saw an unprecedented flood of short sales and foreclosures.
Many of those mortgages were written off. Much of this money was used to purchase discretionary toys, whether it was a new speedboat, a Hummer or, ironically, a second home or rental property.
Most of it was lost because it was simply not affordable.
This did not have to be because the majority of loans at that time were secured by specific income loans or without documentary loans.
Outstanding mortgage debt is low compared to the early 2000s
Today, things are much different in the housing market. Your typical homeowner has a 30-year fixed mortgage. Maybe they even have a 15 year fixed.
There’s a good chance they’ll have a mortgage interest rate of between two and four percent. Maybe even less. Yes, some homeowners have rates that start with the number “1.”
Many of them also purchased their properties before prices skyrocketed before the pandemic.
So the maximum national value is ridiculously low below 30%. In other words, for every $1 million of the home’s value, the borrower only owes $300,000!
Just look at the chart of Ice This shows the huge gap between debt and equity.
Keep in mind that the average homeowner has a significant amount of mostly untapped home equity, with the ability to take out a second mortgage while maintaining a large cushion.
In short, many current homeowners took on too little mortgage debt compared to the value of their property.
Despite this, we are still suffering from an affordability crisis. Those who have not yet purchased often cannot afford it.
Home prices and mortgage rates are too high to qualify as new home buyers.
The problem is that there is little reason to reduce home prices because the current owners are well off. There are very few properties available for sale.
Given the high prices and poor affordability, some think we are living in another bubble. But it’s hard to get there without funding.
As mentioned, the financing was very clean. He was also very conservative.
In other words, it is difficult for a widespread collapse to occur where millions of homeowners default on their mortgages.
Meanwhile, current homeowners value their mortgages more than ever because they are so cheap.
Simply put, current housing payments are their best option.
In many cases, renting or purchasing an alternative property will be much more expensive. So they stay put.
Do we need a second wave of subprime mortgages to depress the housing market?
So how can we weather another housing market crash? Well, I’ve been thinking about this a lot lately.
While housing is not the “issue” this time around, as it was in the early 2000s, consumers are becoming weary.
There will come a time when many will need to borrow from their homes to meet daily expenses.
This may mean taking out a second mortgage, such as a HELOC or home equity loan.
Assuming this happens en masse, you could see a situation where mortgage debt explodes to even greater levels.
At the same time, home prices could stagnate and even fall in some markets due to continued unaffordability and weak economic conditions.
If that happens, we could face a situation where homeowners run out of money again, with less equity as a cushion if they default on repayments.
Then you could have a housing market full of properties that are much closer to reaching cap, similar to what we saw in the early 2000s.
Of course, the big difference will still lie in the quality of the underlying mortgages.
First mortgages, if they remain unchanged, will remain very cheap, fixed-rate mortgages.
So, until then, a major housing market crash seems unlikely.
Certainly, I can see newer homebuyers who didn’t get a very low mortgage rate, or low purchase price, walking away from their properties.
But the bulk of the market is not the homeowner this time. Sales volume has been low since mortgage rates and prices are high.
The point here is that we are still in the early stages of the housing cycle, which is as strange as it sounds.
That is, if you want to build it on new mortgage debt (borrowing) in this cycle.
Because if you look at the chart posted above, it’s clear that today’s homeowners haven’t borrowed much at all.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
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