With the real estate market rising, inventory low and home construction backlog, many consumers wonder if what has gone up has to go down – in other words, are we facing another real estate market collapse? Let’s take a closer look.
Think back to the great recession
The unforeseen collapse of the real estate market 15 years ago sparked a global recession. Driven by low interest rates, loose standards for mortgage credit and the country’s unwavering confidence in home ownership, property values rose at record rates year after year. When the real estate bubble burst, around nine million families lost their homes to foreclosure or short sales between 2006 and 2014. Property values were down 30% or more, homeowners lost a total of $ 7 trillion, and it took nearly a decade for most markets to recover. Some real estate markets have not fully recovered to date.
Given the robust market activity we’ve seen lately, could there be a market crash in the near future? The short answer is “unlikely”. Today’s market book cannot be fully sustained, but a crash as severe as it was 15 years ago is unlikely due to a number of important factors.
Factor # 1: Stricter lending standards
Loose mortgage credit practices ultimately brought some of the largest banks and mortgage lenders in the country to a standstill. The impact has forced Congress and federal regulators to make significant adjustments that have fundamentally changed the way mortgage lending is regulated.
Since then, standards have been raised and the process of getting a mortgage is now more transparent. The “Anyone Can Get One” loans of the past are illegal. Now borrowers are subject to stricter income, credit and wealth reviews. An entirely new regulator, the Consumer Financial Protection Bureau, was created to enforce this new regulatory framework. Lenders who fail to meet these standards can face hefty penalties.
As a result, the real estate finance market is more robust and secure today than it was 15 years ago. A decline in the real estate market will be cushioned by these stricter regulations.
Factor # 2: Forbearance on Pandemic Mortgages
When the property market collapsed in 2007, the influx of foreclosures pumped housing supply into areas of falling prices and weak labor markets, while preventing recently foreclosed borrowers from re-entering the market as buyers. According to the Federal Reserve, foreclosures during periods of high unemployment could depress prices and plunge homeowners across the country deeper into negative equity.
In the pandemic season, however, the impact of mass unemployment bears little resemblance to the Great Recession, in large part due to leniency programs that have allowed homeowners to postpone their monthly mortgage payments without incurring penalties.
In early March 2021, 2.6 million homeowner mortgages were in such forbearance plans. As the pandemic economy has slowly recovered, many homeowners have resumed their jobs and, with them, their home payments. According to CoreLogic, mortgage defaults were down 5.8% through the end of 2020 due to the leniency program. The proportion of mortgages that were 60 to 89 days overdue fell to 0.5% and was below 0.6% in December 2019.
It’s worth noting that serious arrears – defined as 90 days or more past due, including foreclosure loans – increased with forbearance from owners who owed large amounts. By the end of 2020, the serious crime rate was 3.9% after 1.2% in December 2019.
Factor # 3: The pillow of most homeowners – equity
Equity is the difference between the current market value of your home and the amount you owe for it. In other words, it’s that part of your home’s worth that you actually own. Justice can be an incentive to stay in your home longer. When prices go up – which we’ve seen almost everywhere across the country over the past few months – your equity goes up too.
Why is that important? Put simply, higher levels of equity curb homeowners from default when home values fall.
For the past decade, American homeowners have enjoyed the stability and growth of homes and built up large home reserves. In the third quarter of 2020, the average family on a mortgage had $ 194,000 home equity, and the average homeowner gained approximately $ 26,300 in equity over the year. In contrast, nearly a quarter of the country’s mortgaged homes in 2009 were worth less than the amount their owners actually owed on those mortgages.
Factor # 4: Price growth will slow but continue
The sales boom followed the COVID-19 outbreak and surprised many real estate economists. As with most other lines of business, properties were expected to be on lockdown (unless many locations require it). However, sales rose sharply in mid-April as buyers, including many millennials, took advantage of record-low mortgage rates. Through the end of 2020, rates remained below 3%, and sales of existing properties were at their highest level in 14 years.
A moving target
While no one can say for sure what will happen to the real estate sector, most experts are confident that we will see a market collapse, but certainly not a crash. In the meantime, motivated real estate professionals have plenty of work to do. Learn how Homes.com can help you connect with the current market of active buyers and sellers!
Mark Mathis is Vice President Sales at Homes.com. For more information, please visit marketing.homes.com.