5 reasons NOT to fear a housing crash
As we head into 2019, it seems like everyone is awaiting the experts’ next housing crash prediction. Some of those experts do warn there’s trouble brewing in the U.S. housing market; asserting fear that another housing crash like the one we experienced a decade ago could be on the horizon. What is it about the market that makes experts so concerned?
One reason is that home values have surpassed their pre-crash high. The most recent Case-Shiller Home Price Index showed that home prices continued to rise across the country; growing more than 6% year-over-year in June.
The Housing Bellwether Barometer is an index of homebuilders and mortgage companies. In 2017, it skyrocketed like it did in 2004 and 2005. That’s according to its creator, Stack Financial Management, which used it to predict the 2008 financial crisis. Similarly, the SPDR S&P Homebuilders ETF has risen 400% since March 2009. SPDR refers to the S&P Depository Receipts, an exchange-traded fund that tracks Standard & Poor’s 500 Index. It outperformed the S&P 500 rise of 270 percent.
According to a CBS article, “storm clouds are gathering,” pointing to recent indications from Fed Chair Jerome Powell that more interest rate hikes are to come, which could further dampen affordability and suppress demand. The Federal Reserve began raising the benchmark fed funds rate in 2015. At first, it spurred demand as homebuyers sought out mortgages while rates were still low. Now, that demand has dried up.
Then there’s another concern about the increase in unregulated mortgage brokers. In 2018, they originated 52% of U.S. mortgages. That’s more than 48% of the sector originated in 2007. Six of the 10 largest mortgage lenders are not banks. They aren’t as regulated as banks. That makes them more vulnerable to collapse if the housing market softens again.
In 2016, 5.7% of all home sales were bought for quick resale. These “flip” homes are renovated and sold in less than a year. Attom Data Solutions reported that’s the highest percentage since 2006, during the last boom.
As you can see, there is a lot of uncertainty regarding the real estate market and next housing crash prediction heading into 2019. But, don’t fear, here are 5 reasons why today’s market is much different than it was prior to the last crash:
- There are fewer foreclosures on the market now than there were in 2006
There will always be foreclosures, but they spiked by over 100% prior to the crash, which became a major challenge back in 2006. Foreclosures sold at a discount and, in many cases, lowered the values of adjacent homes. We are ending 2018 with foreclosures at historic pre-crash numbers. That means there are much fewer foreclosures than we saw at the end of 2006.
- Most homeowners have tremendous equity in their homes
Ten years ago, many homeowners irrationally converted much, if not all, of their equity into cash with a cash-out, refinance. When foreclosures rose and prices fell, they found themselves in a negative equity situation where their homes were worth less than their mortgage amounts. Many just walked away from their houses which led to even more foreclosures entering the market. Today is different. Over 48% of homeowners have at least 50% equity in their homes and they are not extracting their equity at the same rates they did in 2006.
- Lending standards are much tougher
One of the causes of the crash 10 years ago was that lending standards were almost non-existent. NINJA loans (no income, no job, and no assets) no longer exist. ARMs (adjustable rate mortgages) still exist but only as a fraction of the number from a decade ago. Though mortgage standards have loosened somewhat during the last few years, we are nowhere near the standards that helped create the housing crisis 10 years ago.
- Affordability is better now than in 2006
Though it’s difficult to afford a home for many Americans, data shows that it’s more affordable to purchase a home now than it was from 1985 to 2000. And, it requires much less of a percentage of your income today than it did in 2006.
- Homebuilding permits continue to rise
Despite slowing sales, homebuilders continue to request more new home permits. In 2017, they were granted 1.3 million permits, according to the U.S. Census. That’s lower than the average number in the 1990s. On the whole, builders have not oversaturated the market as they did before the financial crisis. As a result, it’s likely home prices will not fall as they did during the crash.
As they await the next housing crash prediction, people who were caught in the 2008 crash are spooked that a 2018 bubble will lead to another crash. But the earlier crash was caused by forces that are no longer present. Credit default swaps insured derivatives such as mortgage-backed securities. Hedge fund managers created a huge demand for these supposedly risk-free securities. That created demand for the mortgages that backed them. To meet this demand for mortgages, banks and mortgage brokers offered home loans to just about anyone. They created the subprime mortgage crisis in 2006.
Is a housing crash coming? Don’t fear. The real estate market in upscale Santa Barbara is alive and well! In fact, I sold five amazing properties during the first two weeks of December alone, and I get new listings all the time — just like the one pictured at the top of this blog. The most important thing to do is work with a seasoned, knowledgeable, understanding and caring real estate professional like me who keeps abreast of what’s happening.
If you’re looking to sell a property in Montecito, Hope Ranch or any of Santa Barbara’s upscale communities, give me a call at 805.886.9378 or email me at Cristal@montecito-estate.com. I’ll happily work with investors and add your listing to my portfolio of fine homes in the area. I’ll make sure you get the best return on your investment.