When you take a look at what today’s real estate market is doing, it’s hard not to wonder if history is about to repeat itself. Are we looking at another housing crisis similar to 2008? Due to high demand and a shortage of workers and supplies, house prices are on the rise and so are interest rates. Buyers are finding themselves in bidding wars and sometimes paying over asking price to secure the property they want. Are homeowners overpaying? Will their homes still be worth more than what they owe on them a couple of years from now?
If we look back to 2008, you will discover that the subprime loans that lenders were participating in were the primary reason for the housing market crash. According to TransUnion, between 2007 and 2008 alone, the mortgage delinquency rate rose by 53%. When borrowers started defaulting on these loans, the foreclosures caused turmoil in the financial market as well as the stock market, causing what is being termed a global “Great Recession”. It was an epic financial and economic collapse that cost many ordinary people their jobs, their life savings, their homes, or all three.
The Bureau of Labor Statistics reported that nearly 9 million Americans lost their jobs from the late 2007’s through mid-2009. By the end of 2009, more than 3.9 million homeowners received foreclosure notices. Americans also experienced a severe loss of household wealth, or home equity. Not only could they not afford to pay their mortgage, but if they tried to sell their house, it was worth less than what they owed on it, meaning that the mortgage was “underwater” or “upside-down”.
What about today?
Lenders have since tightened their belt straps to lessen their risk by revising guidelines and being stricter with the requirements of mortgage approval. Prior to 2008, subprime mortgages like no income/no asset verification and stated income loans were very common. Interest Only and Adjustable Rate Mortgages were popular too. However, buyers were finding that once the initial fixed rate period expired and the new, higher market rate went into effect, they could no longer afford their homes. Some economists would even say that, in some cases, lending was too lax and reckless, sometimes deceptive, and the recession was inevitable.
Today’s stricter lending practices means that today’s borrowers are stronger financially than in the past. Lenders are more wary and want to be assured of the borrower’s ability to pay back these mortgages.
When we compare what happened then to what is happening today, there are some major differences:
- Lenders now have access to enhanced mortgage underwriting tools that are better predictors of collateral risk assessment and performance, while also being better able to identify fraud. This has resulted in higher quality loans.
- A new rule published by the Consumer Financial Protection Bureau (CFPB) amended Regulation Z, which implements the Truth in Lending Act (TILA). Regulation Z currently prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer’s ability to repay their residential mortgage loan. Loans that comply with Regulation Z’s requirements qualify for certain protections from liability.
- The Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 restricted some of the riskier activities of the biggest banks, increased government oversight of their activities, and forced them to maintain larger cash reserves. On the consumer side, it attempted to reduce predatory lending.
- Recently, the household debt-to-income ratio reached a four-decade low. The maximum DTI ratio is now at a maximum of 50%. So, fewer homeowners are at risk from defaulting on their mortgage.
- As the pandemic and supply shortages come to an end, new home building will be increasing. With more options for homebuyers, current home prices will have to level off, if not decrease.
- In 2008, there was a lot of real estate inventory from short sales and foreclosures, but there were few qualified borrowers. In today’s market we have a very low inventory of real estate and lots of qualified buyers.
Therefore, we are now better prepared if a downturn does occur. It is important to note, however, that the market is cyclical and what goes up, eventually goes down. When interest rates increase, a buyer’s ability to afford a home decreases. As demand slows, the market stabilizes and home prices go back down. As rental prices continue to increase, the best, and cheapest option for many is to look into home ownership.
Whether you’re looking to purchase or refinance, please give Mortgage Warehouse a call or complete our quick application. We can help navigate you through the ups and downs of the housing market and provide you with advice specific to your needs. Checking your mortgage eligibility is usually the best way to get started.