With home prices out of reach for many and affordability the worst in decades, many people are talking about another housing market collapse.
However, just because purchase terms are not affordable does not mean we will see cascading declines in home prices.
Instead, we may see years of stagnant growth or real housing prices that do not actually keep up with inflation.
All this really means is that homeowners will not see their property values rise as dramatically as they have in years past.
At the same time, it also means that those waiting for a crash as a potential entry point to buy a home may continue to be disappointed.
This chart perfectly sums up what it was like then versus now
Just look at this chart of Federal Reservewhich breaks down the nature of mortgages today. In other words, when they were made.
It shows that a large portion of the premium mortgage world was created in a very short period of time.
60% of outstanding home loans were made primarily from 2020 to 2022, when 30-year fixed mortgage rates were at all-time lows.
In contrast, approximately 75% of all outstanding loans originated from 2006 to 2008.
Why does that matter? Because underwriting standards were at their worst ever during those years in the early 2000s.
This meant that the vast majority of home loans originated at that time either were not intended to be made to begin with or simply were not sustainable.
In short, you had a housing market built on a house of cards. None of the underlying loans were of good quality.
The spigot of easy credit ran dry and house prices collapsed
Once the easy credit tap was turned off, things fell apart quickly.
In 2008, we saw an unprecedented number of short sales, foreclosures and other distressed sales. Home prices are falling in double digits across the country.
It only worked as long as it worked because financing kept diluting as it went up, and valuations kept getting inflated higher.
We are talking here about stated income loans, non-documentary loans, and loans with a loan-to-value (LTV) ratio exceeding 100%.
And serial refinancing is where homeowners take out the equity on their homes every six months so they can buy new cars and other luxuries.
Once that stopped, and she was unable to obtain such a loan, things took a turn for the worse.
More than half of recent mortgages were made when fixed interest rates hit all-time lows
Now let’s consider that the bulk of mortgages today are 30-year fixed rate loans with interest rates ranging from 2 to 4%.
It’s basically the opposite of what we saw at the time in terms of credit quality.
Furthermore, many homeowners have a very low LTV ratio because they purchased their properties before prices skyrocketed.
So they rely on some very cheap fixed payments that are often much cheaper than renting a similar home.
In other words, Their mortgage is the best deal in town They will be hard pressed trying to find a better option.
There has also been a construction shortage since 2010, meaning that reduced supply has kept demand under control.
Conversely, in 2008, a mortgage was often a terrible and clearly unsustainable deal, while rent was often a cheaper alternative.
Homeowners had no equity, and in many cases their equity was negative, coupled with terrible loans.
Said loan was often an adjustable rate mortgage, or worse, an ARM option.
So the homeowners had little reason to stay. A loan they can’t afford, a house that’s not worth anything, and a cheaper alternative to housing. leasing.
There are new risks to the housing market to consider today
They say that history does not repeat, it rhymes. Yes, it’s a cliche, but it’s worth exploring what’s different today but still a concern.
It would not be fair to completely ignore the risks facing the housing market right now.
Although it is not 2008 again, there are many challenges that we need to address.
One problem is that all other costs have skyrocketed. We’re talking car payments, insurance, groceries, and all the other non-optional needs.
For example, you have homeowners insurance that has gone up by 50% or more.
You have homeowners who are excluded from their insurance and then need to get a much more expensive government plan.
You have property taxes that have jumped higher. You have maintenance that has become more expensive, HOA dues that have gone up, etc.
So, while the mortgage may be cheap (and stable), everything else has risen in price.
Simply put, there is an increased likelihood of financial stress, even if it has nothing to do with the mortgage itself.
This means homeowners face headwinds, but they are unique challenges that are different than they were in the early 2000s.
What could be the result? It’s not clear, but homeowners who bought pre-2021 and earlier are probably doing very well.
Between the record low mortgage rate and a home price that was well below today’s prices, there wasn’t much to complain about.
New home buyers may be in a tough spot
You can see in the chart above that mortgage lending volume declined as mortgage rates rose in early 2022.
This is it Actually a good thing Because it tells you that we have sound home loan security today.
If loans continue to be made in large quantities, this indicates that the guardrails implemented due to the previous housing crisis have not been effective.
This is a great safety net. Much fewer loans have been originated recently. But there will still be millions of homebuyers from 2022 onwards.
They could be in a different boat. The loan amount may be much higher due to the higher purchase price.
Mortgage rates will also rise, and perhaps a temporary buyout will reset higher. Not to mention high property taxes and expensive insurance premiums.
For some of these people, one could argue that renting may be a better option.
It may actually be cheaper to rent a similar property in some of these cities across the country.
The problem is that it may also be difficult to sell if you are a recent homebuyer because the proceeds may not cover the balance.
This doesn’t mean short sales will make a huge comeback, but you could have pockets where there is enough downward pressure on home prices that traditional selling no longer works.
Another thing that’s unique about this era is the abundance of short-term rentals (STRs).
Some metros have a very high concentration of STRs like Airbnbs and in those markets they have become very competitive and saturated.
For some of these homeowners, they may be interested in jumping ship if vacancy rates continue to rise.
Of course, the vast majority probably bought when prices were much lower and they had very low fixed mortgage interest rates as well.
Therefore, it is unclear how much problem you might encounter if only a few devices are discharged at once.
Housing affordability is worse today than it was in 2006
However, risks remain, especially since affordability is worse than it was in 2006 Ice.
But since financing has been so limited and loan volumes have been so low recently, it is still difficult to see a significant decline.
However, real estate is always local. There will be cities under more pressure than others.
It will also be a pivotal year for home builders, who have seen their housing inventory increase.
If anything, I will be watching the housing market carefully as we head into 2025 as these developments emerge.
However, I wouldn’t be too concerned just yet, as it remains an unaffordability issue. It is not a financing problem as it was at the time, which tends to spark bubbles.
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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