10yr Anniversary of Housing Crash – Where are we now?

As anniversaries go, it’s a nerve-racking but inescapable one: It’s been 10 long years since the widespread real estate crash that precipitated the Great Recession.  So it seems a perfect time to take a step back and assess what has happened to the American housing market in the decade since.   So where are we?

 

Ever-steeper home prices: check. Buyers clamoring to get into those precious homes: check. Real estate newbies scooping up homes to renovate quickly and sell for a profit (i.e., flip): check. Ugh…  On first or even second glance, things are looking awfully similar to the real estate boom that preceded the epic bust. But hold on –  If we look beneath the surface, there are key differences between then and now.

As we compare today’s market dynamics to those of a decade ago, it’s important to remember rising prices didn’t cause the housing crash

It was rising prices stoked by subprime and low-documentation mortgages, as well as people looking for short-term gains that created the environment for the crash.

By contrast, today’s housing market is characterized by a significant mismatch between 1 – Significant job and household growth (These factors spur people to buy homes) 2 – Much tighter lending standards and

3 – Historically low for-sale inventory (Both of which make it difficult for people to buy new homes).

The result: extremely high home prices and a lot of frustrated buyers.   But how much higher?

The U.S. median home sales price in 2016 was $236,000, only 2% higher than in 2006. And 31 of the 50 largest U.S. metros are back to pre-recession price levels.

Nationwide data show that listing prices have been up by double digits for the majority of 2017.

The biggest change on the housing scene over the past decade is that lending standards are the tightest they’ve been in almost 20 years. The Dodd-Frank Act, which was passed to tamp down the risky lending that led to the bubble and its collapse, requires loan originators to show proof that a borrower can repay the loan. As a result, the median 2017 FICO score was 734, significantly up from 700 in 2006.

The low end of the range has pulled up as well.  The bottom 10% of borrowers have an average FICO of 649 in 2017, up from 602 in 2006.

Lending standards are critical to the health of the market. Ten years ago an under-regulated lending environment allowed borrowing beyond repayable amounts and atypical mortgage products, and that pushed up home prices without the backing of income and equity.

Sure, Flipping is hot again, but now it’s under control

For about as long as we’ve had a housing market folks believed that prices would never go down and that a home was always a good investment.Unfortunately, the housing crash exposed this fallacy big-time.

In 2006, the share of flipped homes reached 8.6% of all sales, exceeding 20% in some metros such as DC, and Chicago. And some flippers took out multiple loans to afford properties!  With today’s tight lending environment limiting borrowing power flipping accounted for a more reasonable 5% of sales in 2016.

But while stricter lending standards have kept flipping in check, it’s contributing to a housing inventory shortage—and that’s keeping prices elevated.

Today’s market is also well below normal construction levels with only 0.7 single-family household starts per household formation.

What’s also driving today’s housing market is high employment levels.  In 30 of the 50 largest U.S. metros, unemployment is less than half of 2010 levels. Employment is particularly robust among millennials, who are just starting their careers.   But at the same time, there are 600,000 fewer total housing starts and nearly 700,000 fewer single-family housing starts.

Put succinctly  – The healthy economy is creating more jobs and households, but not giving these people enough places to live.  But rapid price increases will not last forever and we can expect a gradual tapering as buyers are priced out of the market—not a market correction, but an easing of demand and price growth as renting or adding roommates becomes a more affordable alternative.

Looking further down the line, the housing market should be healthy for a while. Millennials made up 52% of home shoppers last spring, and with the largest concentration of millennials expected to turn 30 in 2020, their demand for homes is only expected to increase.

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