House Hunting
The recent media headlines and news articles have many people worried that we’re about to face a repeat of the 2008 housing crash. While it is true that the real estate market had a dramatic shift in the last few months, the circumstances we are in today are significantly different than during the Great Recession.
To see why, it’s important to first understand what caused the housing crisis 15 years ago.
The primary reason was poor lending practice. Starting around 1999, Wall Street investors began to push for more mortgages. To satisfy this sudden demand, lenders were pressured to increase the number of loans they gave out, even if it meant lending to people who were not as well qualified. Thus came the rise of subprime mortgages.
At the time, there were little to no regulations for lending, with traditional banking agencies focusing more on personal gain than consumer protection. This allowed mortgage brokers to offer predatory loans that were risky and highly likely to fail.
In most cases, loans were given without first verifying income, employment, savings, credit, and other requirements. On the surface, this may have seemed like great news to buyers who suddenly found themselves qualifying for a home they thought was out of their budget. What they failed to realize was that the financial burden was more than what they could realistically afford.
The majority of those loans were ARMs (Adjustable Rate Mortgages) with low “teaser” rates that then increased afterwards. Typically, the borrower was only paying interest for the first few years, so at first glance, it seemed easily doable. However, once that initial term ended and they had to start paying the principal + interest, the monthly payments suddenly skyrocketed.
Many times, mortgage brokers did not properly explain all of the terms and conditions of the products they were offering, and borrowers would sign the paperwork, not knowing exactly what they were getting into. By the time they realized the situation, they were already locked into the loan.
If they were unable to make the payments, the banks would file a Notice of Default. Without the funds to pay off the loan, borrowers had no choice but to stand by as their home eventually went to foreclosure.
Millions of these subprime mortgages were given out in 1999 and into the early 2000’s. It was around 2007 and 2008 that these initial “teaser” rates on the ARMs ended, causing homeowners to default on their loans.
When a small number of homes foreclose, the market is able to absorb the impact and remain virtually unaffected. But when tens of thousands of foreclosures hit the market at once like it did in 2008, there were suddenly too many homes for sale and not enough people to buy them. As a result, home prices dropped drastically in a short period of time and the market crashed.
Today, the circumstances are significantly different.
Unlike the early 2000’s, there are now strict lending guidelines and regulations that were put into place to prevent a repeat of what happened during the housing crash. Brokers must now verify the customer’s financial standings in order to qualify for the loan, and subprime mortgages are virtually nowhere to be found.
In our local area, we are at a low supply of only 2.5 months of inventory. New home builders are also mindful of the pace at which they develop land and construct new communities to prevent an oversupply of homes. Lawrence Yun, the chief economist at NAR (National Association of Realtors), says, “We simply don’t have enough inventory. Will some markets see a price decline? Yes. [But] with the supply not being there, the repeat of a 30% price decline is highly, highly unlikely.”
At the Real Estate Forecast Summit, experts revealed that the number of mortgage delinquencies and homes in foreclosure are exponentially lower than what they were in the last housing cycle.
Equity is another factor to consider. When homeowners have enough equity, they can sell their home to pay off their loan or refinance to a lower interest rate. But during the Great Recession, most homes went to foreclosure because borrowers owed more on their mortgage than what their property was worth. Today, that’s not the case. According to CoreLogic, the average homeowner equity in the U.S. has actually grown by $34,300 in the past 12 months. In fact, nearly half of the homeowners in Chino Hills are sitting on more than $400,000 in equity.
It is true that the buyer frenzy we saw in 2020-2021 is over. Rising interest rates and market uncertainty have slowed down demand, but there is still a strong crowd of buyers in the market, especially with millennials now leaning towards homeownership. In addition, people’s needs changed during the pandemic, pushing more and more people to buy new homes that support their “work from home” lifestyle.
To conclude, there has been a lot of talk that the real estate market is going to crash, but experts are predicting that the low inventory and a steady flow of buyers will prevent a repeat of the 2008 housing crisis. Regardless of the market, the most important thing when buying or selling your home is to find the timing that’s right for you.
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