As the real estate market experiences soaring prices, meager inventories and a new home construction backlog, many consumers are wondering if what has gone up needs to come back down – in other words, are we headed for another crash. of the real estate market? Let’s take a closer look.
Think about the great recession
The unexpected housing market crash 15 years ago triggered a global recession. Fueled by low interest rates, loose mortgage lending standards, and the country’s unwavering confidence in homeownership, home values have been rising at record rates year on year. When the housing bubble burst, around nine million families lost their homes as a result of foreclosure or short sale between 2006 and 2014. Home values fell 30% or more, homeowners said. lost $ 7 trillion collectively and it took almost a decade for most markets to recover. Even today, many real estate markets have not fully recovered.
Considering the robust market activity that we have seen lately, could there be a stock market crash in the near future? The short answer is “unlikely”. Today’s market book cannot be fully sustained, but a crash as bad as it was 15 years ago is unlikely due to a few important factors.
Factor # 1: Stricter Lending Standards
Bulk mortgage lending practices ultimately brought down some of the nation’s largest banks and mortgage companies. The fallout forced Congress and federal regulators to make significant adjustments that fundamentally changed the way mortgages are regulated.
Since then, the standards have been raised and the process of obtaining a mortgage is now more transparent. The “anyone can get one” loans of the past are illegal; now borrowers are subject to tighter controls over their income, credit and assets. A brand new regulatory agency, the Consumer Financial Protection Bureau, has been created to enforce this new regulatory framework. Lenders who fail to meet these standards can face severe penalties.
As a result, the housing finance market is now more robust and secure than it was 15 years ago. Any decline in the housing market will be mitigated by these stricter regulations.
Factor 2: Mortgage forbearance in the event of a pandemic
When the housing market collapsed in 2007, the influx of foreclosures propelled the supply of housing into areas with falling prices and weak labor markets, while preventing recently excluded borrowers from re-entering the country. market as buyers. According to the Federal Reserve, foreclosures during a period of high unemployment could push prices down, plunging homeowners across the country deeper into negative equity.
However, in the era of the pandemic, the effects of mass unemployment bear little resemblance to those of the Great Recession, in large part thanks to forbearance programs that allowed homeowners to defer their monthly mortgage payments without incurring penalties.
As of early March 2021, 2.6 million home mortgage loans were part of these forbearance plans. As the pandemic economy has slowly recovered, many homeowners have resumed their jobs and therefore their home payments. According to CoreLogic, at the end of 2020, overall mortgage delinquencies were down 5.8% due to the forbearance program. The share of mortgages that are 60-89 days past due fell to 0.5%, or less than 0.6% in December 2019.
Housing market crash
It should be noted that serious delinquencies – defined as 90 days or more past due, including foreclosure loans – increased when homeowners who owed large amounts gave up the tolerance. At the end of 2020, the serious delinquency rate was 3.9%, up from 1.2% in December 2019.
Factor # 3: Most Homeowners’ Cushion – Fairness
Equity is the difference between the current market value of your home and the amount you owe it. In other words, it is the part of the value of your home that you actually own. Equity can be an incentive to stay in your home longer; if prices go up – which we’ve seen almost across the country in recent months – your net worth goes up too.
Why is this important? Simply put, higher levels of equity protect homeowners from defaults when home values decline.
Over the past decade, US homeowners have benefited from housing stability and growth, building up large reserves on their home equity. In the third quarter of 2020, the average family with a mortgage had $ 194,000 in home equity, and the average homeowner earned about $ 26,300 in home equity during the year. In contrast, in 2009, nearly a quarter of mortgaged homes nationwide were appraised for less than the amount their owners actually owed on those mortgages.
Factor # 4: Price growth will slow down, but continue
The sales boom followed the COVID-19 outbreak and surprised many real estate economists. Like most other industries, real estate (if not required in many places) was expected to lock in. But in mid-April, sales were skyrocketing as buyers, mostly millennials, took advantage of historically low mortgage interest rates. Throughout the remainder of 2020, rates remained below 3% and existing home sales hit their highest level in 14 years.
A moving target
While no one can say for sure what will happen with the real estate industry, most experts are convinced that we will see a market downturn, but certainly not a crash. In the meantime, there is a lot of work available for motivated real estate professionals. Find out how Houses.com can help you connect with the current market of active buyers and sellers here!
Mark Mathis is Vice President of Sales for Homes.com. For more information, please visit marketing.homes.com.