Today's Housing Market Is Not 2006 All Over Again
With home prices across the country on the rise again this year, there is worry we are repeating the 2006 housing bubble that brought havoc upon many when it collapsed. Our current real estate market is significantly different from the giant meltdown we experienced twelve years ago in the following four areas.
- Home Prices
- Standards For Mortgages
- Mortgage Debt
- Housing Affordability
No one questions that home prices have increased to 2006 levels in several nationwide markets. However, after 10+ years, based on inflation, home prices should be higher.
Chief Economist for Corelogic, (which provides exceptional data on past, current, and future home prices) Frank Nothaft explains "Even though CoreLogic's national home price index got to the same level it was at the prior peak in April of 2006, once you account for inflation over the ensuing 11.5 years, values are still about 18% below where they were."
Standards For Mortgages
Concern for Easing lending standards by banks to a level seen during the financial crisis are worrisome for some folks . However, today's standards have proven to be nowhere as lenient as they were preceding the mortgage crash.
THe Urban Institute's Housing Finance Policy Center issues a Housing Credit Availability Index (HCAI). Per the Urban Institute, "The HCAI measures the percentage of home purchase loans that are likely to default - that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan."
Looking at the graph below, it shows today's mortgage standards are much stiffer on a borrower's credit situation and have pretty much eliminated the riskiest loan products.
Many homeowners back in 2006 made the mistake of using their houses as an ATM, withdrawing and spending the equity they had built up with no concern for ramifications. They took on too much mortgage debt that they were unable to pay back when prices tanked. That is not the case today.
The best indicator of mortgage debt is the Federal Reserve Board's household Debt Service Ratio for mortgages, which looks at mortgage debt as a percentage of disposable personal income.
At the peak of the housing bubble more than 10 years ago, the ratio stood at 7.1%, meaning mortgage payments represented more than 7% of personal disposable income. Today, that percentage is just 4.48%- the lowest level in 38 years!
With mortgage rates and house prices alike on the rise, there is concern that many home-buyers may no longer be able to afford to purchase a home. However, looking at the Housing Affordability Index released by the National Association of Realtors (NAR), homes are more affordable now than at any other time since 1985 (except for when prices crashed after the bubble burst in 2008). See the chart below:
Comparing 2006 to four housing metrics in today's real estate market, we can clearly see that today's housing market is nothing like the bubble market in our distant past.
Fort Lauderdale Neighborhoods
Disclaimer:The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. John Sabia PA and Keeping Current Matters, Inc. does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. John Sabia PA and Keeping Current Matters, Inc. will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.