Tighter mortgage underwriting: Lending standards are much tighter today than during the mid-2000s. Lenders remain more conservative, and the Dodd-Frank Act has all but eliminated speculative products, such as negative-amortization loans and “teaser” rates. Mortgage credit availability remains tighter than it was pre-pandemic. Additionally, the median credit score of borrowers approved for mortgages reached 778 in the fourth quarter of 2021, which is higher than during the previous housing boom.
Household balance sheets have improved: Since the Great Recession, mortgage rates have generally declined helping homeowners refinance into lower mortgage payments, while steadily rising home prices have significantly boosted homeowner equity.
The mortgage debt-to-income ratio is near a four-decade low and homeowner equity is at a historic high. In the fourth quarter of 2021, the national loan-to-value ratio was approximately 31%, the lowest in over three decades and significantly higher than in the fourth quarter of 2008, when it surpassed 50 percent.
The equity buffer is important because the housing crisis during the Great Recession was fueled heavily by the fact that job losses were paired with a significant share of homeowners who had little or no equity in their homes – otherwise known as being “underwater.”
Today, homeowners have very high levels of home equity, providing a cushion to withstand potential price declines, but also preventing housing distress from turning into a foreclosure.
In fact, if distressed homeowners are required to resolve delinquency, given their equity buffers, involuntary sales are much more likely than foreclosures. Why give your equity to the lender in a foreclosure when you can sell the home, pay off your mortgage and take that equity with you?
Housing is not overvalued: If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home. The only period when the median sale price was greater than house-buying power was from 2005 through 2007, indicating an overvaluation of housing, or a “housing bubble.” Today, house-buying power is over $100,000 greater than the median sale price of home, signifying that housing is not overvalued.
Moderation, not bust
Double-digit house price growth is not sustainable in the long-run, especially alongside fast-rising mortgage rates. As rising prices and rising mortgage rates undermine affordability, it’s natural to see some moderation in price appreciation. Some buyers will pull back from the market and sellers will adjust their price expectations, which will prompt house prices to adjust.
But the secular shortage of housing supply relative to demographically-driven demand will continue to keep house price appreciation positive. The underlying fundamental housing market conditions support a natural moderation of house prices rather than a sharp decline. We have clearly experienced a housing market boom, but that doesn’t portend the necessity of a bust.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author responsible for this story:
Mark Fleming at @mflemingecon (Twitter)
To contact the editor responsible for this story:
Brena Nath at [email protected]