Is The Housing Market Heading For Another Crash?
Here in Daytona Beach, we’ve seen double-digit appreciation, home values are at all-time highs, and interest rates are on the rise. It makes sense that we’re on the verge of a housing crash, right? A recent survey even says that 77% of consumers believe we’re in a housing bubble. But let’s unpack some of the facts that tell us our current market is nothing like what we experienced back in ‘07 and ‘08.
First, you might be surprised to learn that housing is actually more affordable now than during the housing boom. Analysts use what is called the affordability formula that has 3 components: the price of the home, the current mortgage rate, and the buyer’s wages. In comparing these 3 components in today’s market, the average buyer pays a lower percentage of their monthly income toward their mortgage payment than they did 15 years ago.
Take a look at this graph showing housing affordability from 07 to today. Here we see mortgage payments as a percentage of income. Conventional lending standards say your mortgage payment should not be more than 28% of your gross income. In 07, people spent a higher percentage of their monthly income toward mortgage payments than they do today.
So you might ask if costs were so prohibitive, how did so many homes sell during the housing boom? That brings us to the next reason our market is much different than the market 15 years ago: it was much easier to get a mortgage then. Lending standards were much looser back and today purchasers that have a mortgage are much more qualified than they were back then. I won’t go into all of the specifics, but the people obtaining mortgages today are much more qualified than many of the buyers 15 years ago.
Reason #3 why today’s market is nothing close to the market 15 years ago: The risk of foreclosure. Let’s take a look at another graph that illustrates foreclosures then vs now. Here we see the number of new foreclosures during the housing crash compared to today’s numbers. The reason there are so few foreclosures? It’s primarily due to the amount of equity people have in their homes today. It’s estimated that over 40% of homes in the US have more than 50% equity, so instead of going into foreclosure, people can simply sell.
So, what does that mean for the housing market? It means that we don’t have a surplus of homes on the market. As you probably know, we actually have a shortage. And the principles of supply and demand tell us that when low supply meets high demand it causes prices to rise. Experts predict that the appreciation we’ve been seeing will slow in the years to come, but they don’t expect prices to drop. We just expect prices to rise at a rate that’s more in line with historical norms.
Bottom line, the headlines can be alarming and while no one has a crystal ball, we’re certainly in a market that’s far different than that of the market 15 years ago.