With rising home prices, mortgage rates, and inflation, many people are wondering if a housing market crash is in the near future. Some can’t help but think that the upward trajectory of the real estate market is looking eerily similar to the period during the boom and bust from 2006 to 2008. However, today’s market is nothing like the market we experienced 15 years ago.
Back in 2006, foreclosures flooded the market which drove down home values dramatically. There were two main reasons for the flood of foreclosures. First, many purchasers were not truly qualified for the mortgage they obtained. Second, a number of homeowners cashed in the equity on their homes. So, when prices dropped they found themselves in an underwater situation (where the home was worth less than the mortgage on the house).
Here’s why today’s real estate market is different:
Today, Demand for Homeownership Is Real (Not Artificially Generated)
Running up to 2006, banks were creating artificial demand by lowering lending standards and making it easy for just about anyone to qualify for a home loan or refinance their current home. Nowadays, purchasers and those refinancing a home face much higher standards from mortgage companies. Additionally, lending standards are much stricter in the current lending environment, meaning there is less concern about possible defaults. Today, the demand for homeownership is still substantial.
People Are Not Using Their Homes as ATMs Like They Did in the Early 2000s
When home prices were rapidly escalating in the early 2000s, many thought it would never end. They started to borrow against the equity in their homes to finance new cars, boats, and vacations. When prices started to fall, many of these homeowners were underwater, leading some to abandon their homes. This increased the number of foreclosures.
The major reason for the housing crash 15 years ago was a tsunami of foreclosures. With much stricter mortgage standards and a historic level of homeowner equity, the fear of massive foreclosures impacting today’s market is not realistic.
If you are anticipating a real estate market downturn so you can snag a cheaper home, that’s not likely to happen. If you have any questions about the conditions of today’s market, give us a call at 562.896.2456.