Is there a housing crash on the horizon? We don’t think so, and there are eight key reasons behind our perspective:
“Right now, loans are of higher quality than they have been since before the last crash.”
- The state of subprime loans. Before the crash in 2008, subprime loans constituted $620 billion and made up 20% of the total mortgage market. Today subprime loans account for just $56 billion (5%) of the total mortgage market. Right now, loans are of higher quality than they have been since before the last crash.
- Credit scores have increased. Over the last 15 years, FICO scores have been steadily rising. In 2009, the average credit score for borrowers seeking a loan was 686. In 2001, it dropped down to between 490 and 510. Since then, though, we’ve seen significant improvements.
- Lending is far more strict. CoreLogic’s Housing Credit Index reports that loans originated in 2016 were of higher quality than any filed in the last 15 years. Tightened lending standards have reduced the impact of fix-and-flip investors. Currently, lenders only finance 55% of home value in the “flip” market. This is a major shift from the 80% or more banks lent out during the subprime crisis.
- The number of homes sold right now is 20% below the pre-crash peak. Right now, there’s less than two months’ worth of available inventory in Orange County.
- Young people are having to save more money due to the past recession. As a result of this, homebuyers are submitting larger down payments in recent times, which provides an additional level of security in their real estate investment.
- Total home equity is still significantly lower than in 2006. Instead of an explosion of home values, recent growth has been steady. There was $85 billion in equity in 2006, and today there is about $14 billion.
- Home prices today make sense if you factor in inflation. Between 2012 and 2017, home prices have risen 6.5% per year on average, and surpassed their 2006 peak as a result. However, these increased prices actually indicate an adjustment for the 11 years of inflation we’ve seen.
- Home builders are focusing on high-end properties. This is likely due to changes in demand, but the question of whether demand is stronger today than in the past is one no one can definitively answer.
The bottom line is this: No one has a crystal ball, but looking to recent market data and forming an educated perspective based on that information can help you gain a general sense of where things may be headed.
If you have any other questions or would like more information, feel free to give us a call or send us an email. We look forward to hearing from you soon.