One of the main reasons why the housing market is much better than before Loaner

With house prices out of reach for many and affordability at its worst in decades, many people are talking about a new housing crash.

However, just because purchasing conditions are not affordable does not mean we will see a cascading drop in property prices.

Instead, we might just see years of stagnant growth or real house prices not actually keeping up with inflation.

All this really means is that homeowners won’t see their property values ​​skyrocket like they have in years past.

At the same time, it also means that those waiting for a crash as a possible entry point to buying a home could continue to be disappointed.

This graph perfectly sums up the era compared to today

Just consider this table of Federal Reservewhich breaks down the vintage of today’s mortgages. In other words, when they were made.

This shows that a large portion of the outstanding mortgage universe was formed in a very short time frame.

Roughly 60% of outstanding home loans were issued between 2020 and 2022, when 30-year fixed mortgage rates were at their historic lows.

In contrast, approximately 75% of all outstanding loans were issued between 2006 and 2008.

Why is this important? Because underwriting standards were at their worst in the early 2000s.

This meant that the vast majority of home loans issued at that time should not have been granted in the first place or were simply unsustainable.

In short, you had a real estate market built on a house of cards. None of the underlying loans were of good quality.

The Easy Credit tap has dried up and house prices have collapsed

Once the tap of easy credit was turned off, things fell apart in a hurry.

In 2008, we saw an unprecedented number of short sales, foreclosures and other distressed sales. And housing prices are cascading double-digit declines across the country.

It only worked for this long because funding continued to loosen as it increased and valuations continued to be inflated upward.

We’re talking about stated income loans, no-document loans, loans with a loan-to-value (LTV) ratio that exceeds 100%.

And serial refinancing where homeowners reduced the equity in their homes every six months so they could buy new cars and other luxury goods.

Once that stopped and it was no longer possible to get such a loan, things got worse.

More than half of recent mortgages were taken out when fixed rates were at record lows

Now consider that the majority of mortgages today are 30-year fixed rate loans with interest rates ranging from 2% to 4%.

This is basically the complete opposite of what we saw at the time in terms of credit quality.

On top of that, many of these homeowners have very low LTVs because they purchased their property before the big price increase.

They therefore benefit from very cheap fixed payments, often significantly cheaper than renting a comparable house.

In other words, their mortgage is the best deal in town and they would be hard-pressed to find a better option.

There has also been underbuilding since the 2010s, meaning low supply has contained low demand.

Conversely, in 2008, mortgage was often a terrible and clearly unsustainable deal, while renting could often be a cheaper alternative.

The owners had no equity and, in many cases, negative equity, combined with a terrible loan to boot.

This loan was often an adjustable rate mortgage, or worse, an option ARM.

The owners therefore had very little reason to stay. A loan they couldn’t afford, a house that was worthless, and a cheaper alternative to housing. Rental.

New risks weigh on the real estate market and must be taken into account today

They say that history does not repeat itself, but that it rhymes. Yes, it’s a cliché, but it’s worth exploring what’s different today but still concerning.

It would not be fair to completely ignore the risks that the real estate market is currently facing.

And even though it is no longer 2008, we must address several challenges.

The problem is that all other costs have increased significantly. We’re talking car payments, insurance, groceries, and basically every other non-discretionary need.

For example, your home insurance may have increased by 50% or more.

You have homeowners who have been let down by their insurance and then have to sign up for a much more expensive public plan.

Property taxes have increased. You have maintenance that has become more expensive, HOA dues that have increased, etc.

So even though the mortgage is cheap (and fixed), the price of everything else has gone up.

Simply put, there is an increased risk of financial stress, even if it has nothing to do with the mortgage itself.

This means owners face headwinds, but they are unique challenges, different from those of the early 2000s.

What could be the result? It’s not clear, but homeowners who purchased before 2021 and before are likely in very good shape.

Between a record-low mortgage rate and housing prices significantly lower than today’s prices, there’s not much to complain about.

Recent Home Buyers Could Be in a Tough Situation

You can see from the chart above that mortgage volume has fallen while mortgage rates have increased in early 2022.

It is actually it’s a good thing because that tells you that we have strong home loan underwriting today.

If loans continued to be issued at high volumes, it would indicate that the safeguards put in place due to the previous housing crisis were not working.

So it’s a big safety net. Far fewer loans have been granted recently. But there were still millions of home buyers starting in 2022.

And they might be in a different boat. Possibly a much higher loan amount due to a higher purchase price.

And a higher mortgage rate as well, possibly a temporary buyout which will be reset upwards. Not to mention higher property taxes and expensive insurance premiums.

For some of these people, it could be argued that renting might be a better option.

It might actually be cheaper to rent a comparable property in some of these cities across the country.

The problem is that it can also be difficult to sell if you’re a recent home buyer, because the proceeds from the sale might not cover the balance.

That’s not to say that short sales are going to make a big comeback, but there could be pockets where there is enough downward pressure on home prices that traditional sales no longer work.

Another thing unique to this era is the abundance of short-term rentals (STR).

Some metropolises have a very high concentration of STRs like Airbnbs and in these markets, it has become very competitive and saturated.

Some of these owners might be interested in jumping ship if vacancy rates continue to rise.

Of course, the vast majority probably bought when prices were much lower and they also benefit from ultra-low fixed mortgage rates.

So it’s not clear how much of a problem you’d have if only a handful of them were discharged at the same time.

There are nevertheless risks, particularly with a level of accessibility worse than it was in 2006, according to ICE.

But given that funding has been quite tight and loan volumes have been very low recently, it still seems difficult to envisage a significant slowdown.

That said, real estate is always local. Some cities will be under more pressure than others.

It will also be a pivotal year for homebuilders, who have seen their housing inventory increase.

If anything, I would watch the real estate market cautiously as we approach 2025, as these developments emerge.

However, I wouldn’t be too worried just yet as it remains an unaffordability issue. And not a financing problem like at the time, which tends to generate bubbles.