Here’s why this real estate slowdown has nothing to do with the previous one

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As quickly as mortgage rates rise, the once-hot housing market is cooling. House prices are still historically high, but there are now fears that they may also ease.

All of this has people wondering: Is today’s real estate market in the same predicament it was over a decade ago when the crash of 2007-2008 caused the Great Recession?

The short answer is no. The US real estate market is in much better shape today. This is partly thanks to the new lending regulations that resulted from this collapse. These rules put today’s borrowers on a much stronger footing.

For the 53.5 million first mortgages in America today, the average FICO borrower credit score is a record 751. It was 699 in 2010, two years after the financial sector crashed. . Lenders have been much stricter on lending, which is largely reflected in credit quality.

Home prices have also soared due to pandemic-fueled demand over the past two years. This gives today’s homeowners record amounts of home equity. So-called workable net worth, which is the amount of money a borrower can get out of their home while leaving 20% ​​equity on paper, hit a collective record high of $11 trillion this year, according to Black. Knight, a mortgage technology and data provider. That’s a 34% increase from a year ago.

At the same time, leverage, which is the amount of homeowner debt relative to the value of the home, has dropped dramatically.

Total mortgage debt in the United States is now below 43% of current home values, the lowest on record. Negative equity, which is when a borrower owes more on the loan than the home is worth, is virtually non-existent. Compare that to more than 1 in 4 borrowers who were underwater in 2011. Only 2.5% of borrowers have less than 10% equity in their home. All of this provides a huge cushion should house prices fall.

Fewer risky loans

There are currently 2.5 million adjustable rate mortgages, or ARMs, outstanding today, or about 8% of active mortgages. This is the lowest volume ever recorded. MRAs can be fixed, usually for terms of five, seven or 10 years.

In 2007, just before the housing crash, there were 13.1 million ARMs, or 36% of all mortgages. At the time, taking out these types of loans was sketchy to say the least, but new regulations following the housing crash changed the rules.

Today, ARMs are not only purchased at their fully indexed interest rate, but over 80% of today’s ARM originations also operate at a fixed rate for the first seven to 10 years.

A ‘for sale’ in front of a home in Hercules, California, U.S., Tuesday, May 31, 2022. Homebuyers are facing a deteriorating affordability situation with mortgage rates hovering around the highest levels since more than a decade.

David Paul Morris | Bloomberg | Getty Images

Today, 1.4 million ARMs are currently facing higher rate resets, so given higher rates, these borrowers will face higher monthly payments. It is definitely a risk. But, in 2007, about 10 million ARMs faced higher resets.

Mortgage defaults are low

Mortgage delinquencies are now at an all-time high, with just under 3% of mortgages in arrears. Even with the sharp increase in delinquencies in the first year of the pandemic, there are fewer mortgages in arrears than before the pandemic. Pandemic-related mortgage forbearance programs have helped millions of borrowers recover, but there are still 645,000 borrowers in those programs.

“The mortgage market is historically very strong,” said Andy Walden, vice president of corporate research at Black Knight. “Even the millions of homeowners who took forbearance during the pandemic have performed well overall since abandoning their plans.”

There are, however, around 300,000 borrowers who have exhausted pandemic-related forbearance programs and are still in default. Additionally, while mortgage delinquencies are still historically low, they have tended to increase lately, especially for newer loan originations.

“We’ll want to keep an eye on that population moving forward,” Walden said.

The availability of mortgage credit is far lower than it was just before the pandemic, according to the Mortgage Bankers Association, suggesting still tight standards. But lenders have lost about half of their business since rates started to rise, which could mean they are becoming more aggressive in lending to less creditworthy borrowers.

The biggest issue in the housing market now is housing affordability, which is at an all-time high in at least 44 major markets, according to Black Knight. Although stocks are starting to rise, they are still around half of pre-pandemic levels.

“Rising inventory will eventually cool home price growth, but the double-digit pace has shown remarkable gripping power so far,” said Danielle Hale, chief economist at Realtor.com. “As higher housing costs begin to push some buyers’ budget, those remaining in the market can expect relatively less competitive terms later in the year.”

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