In 2007, an influx of houses on the market married with a credit crisis caused housing prices to plummet. This trapped homeowners who couldn’t afford their mortgage payments, and couldn’t sell their house. When the values of these homes crumbled, banks stopped lending to each other. This created the financial crisis that is better known as the Great Recession.
Today, homeowners are nervous when it comes to the current economic situation and speculation of a US housing bubble is gaining momentum. Home prices have reached record highs and interest rates have jumped significantly causing affordability to dive.
Fortunately, today’s strong housing market is radically different and far healthier. There are three major reasons why today’s housing market is not a bubble:
- Lower housing inventory has been causing home prices to rise to historic highs
- Homebuyers have a lot more purchasing power
- Mortgage lending standards have been more stringent since 2011
1. Low housing inventory has been causing home prices to rise to historic highs
The supply of homes available for sale needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will cause prices to depreciate. Anything less than that is a shortage and will lead to continued price appreciation.
From 2007 to 2010, there was an excess inventory of too many homes for sale on the market (many being short sales and foreclosures), and that caused prices to drop.
In 2020, there was an increase in demand as people wanted homes with more space and away from highly populated areas. Adding to the demand was historically low interest rates. With the cost of money being practically free, an influx of buyers hit the market looking to take advantage of these rates.
2. Homebuyers have a lot more purchasing power
With the recent interest rate hikes, the real estate market has shifted, causing homes to stay on the market longer due to a decrease in buyer demand. As of now, the inventory of homes still remains low, but more are piling up as buyer sentiment is changing.
3. Mortgage lending standards have been stringent since 2011
The current housing cycle may be drawing comparisons to the real estate market of the mid-2000s, but the requirements to qualify for a mortgage are far stricter. Pre-Great Recession, practically anyone could qualify for a mortgage. Now, there is a strict list of documents required to prove qualifying income and assets. Credit score, debt-to-income ratio requirements and overall credit worthiness of borrowers is much stronger.
Bottom line: As of now, the housing market and mortgage standards have not indicated cause to expect a housing bubble. Although buyers may be worried about shifting conditions, they’re actually just returning to familiar, pre-pandemic levels.
If you have any questions regarding the current housing market, please give us a call at (760) 930-0569 and one of our loan officers will assist you.