The 2022 housing market started as a strong seller’s market but weakened as rates increased over the spring and summer. Enter into 2023, when homes are staying on the market longer, seller concessions have increased, and home values have decreased slightly. We have not shifted into a buyer’s market, but there is concern and speculation that we are entering a housing bubble similar to what ignited the 2007 housing crisis. I do not believe this to be true.
What makes me think that we are not headed into another housing crisis?
In 2006, the housing market had been booming for a decade, and prices were at all-time highs. The average home was worth $246,500 vs. a value of $169,000 in 2000.
At the same time, the following conditions were also occurring:
• There was an excess of construction as builders built the most homes ever in a single year (2006).
• Mortgage lending was extremely liberal. In addition to “No Doc” loans (no proof of income or assets), there were subprime loans offered to borrowers with low/impaired credit scores.
• Despite increasing home values, the average homeowner had only ~18% equity in their home. This was mostly due to an increase of cash- out refinances leading up to 2007, to pay off excessive credit card usage.
• Foreclosure rates peaked in 2010 at 2.23% due to job losses, poor qualifying guidelines, and limited equity in a home.
Here are the differences in today’s market:
• New builds are not keeping up with household formations. After the housing crisis, new builds slowed dramatically and created a supply/demand issue for buyers. Less homes are being built than needed, due to the pandemic and supply-chain issues. There is pent-up demand for people wanting to form households, and we expect that demand for the next decade. The average first time homebuyer is 33 years old, and birth rates show an increase of this age group for the next ten years.
• The Dodd-Frank Act was enacted in 2010 and has tightened mortgage underwriting and lending guidelines. The risk of mortgage default is now less than 1%.
• Average homeowners now have approximately 58% equity in their homes.
• The forbearance option during the pandemic protected homeownership and credit scores. This avoided a foreclosure crisis for thousands of people. Foreclosure rates are currently sitting at .11% – the lowest rate since 2005.
While we see a softening market, the risk of a true housing crisis is unlikely. Instead, the housing market will shift again to a strong seller’s market as rates start to decrease. Inflation drives mortgage rates up, and we saw inflation peak in 2022. As inflation declines this year, so will mortgage rates. I hope to see the expected rates reach the 5% range by end of year. With those lower rates, the buyer’s market will revert to its highly competitive nature. The real estate market will weather this winter and ramp up come spring.
If you would like more insights about the market and your financing potential, please contact a Planet Boulder Loan Officer.