With housing prices out of reach for many and the most affordable in decades, many people are talking about another housing crisis.
However, just because buying conditions are unaffordable does not mean we will see a drop in home prices.
Instead, we may just see years of stagnant growth or real home prices not keeping pace with inflation.
It just means that homeowners won’t see their property values rise as much as they did in previous years.
At the same time, it also means that those waiting for the crash as an entry point to buying a home may continue to be disappointed.
This Chart Totally Summarizes Then and Now
Consider this chart from the Federal Reserve, which breaks down today’s mortgage yields. In other words, when they are made.
It shows that a large portion of the entire mortgage outstanding is done in a very short window.
In fact 60% of outstanding mortgages were made from 2020 to 2022, when 30-year mortgage rates were at an all-time low.
In contrast, something like 75% of all outstanding loans were established from 2006 to 2008.
What does that matter? Because writing standards were at their worst during those years in the early 2000s.
This meant that most of the mortgages that were originated at that time should not have been made in the first place or were unsustainable.
In short, you had a housing market built on a house of cards. None of the underlying loans were of good quality.
Easy Credit Spigot Ran Dry and Home Prices Dropped
Once the easy credit faucet is turned off, things go downhill fast.
Back in 2008, we saw an unprecedented number of short sales and foreclosures and other distressed sales. And double-digit home price drops across the country.
It worked as long as it did because funding continued to loosen as it went up, and valuations continued to rise.
We are talking about a specified income loan, no docket loan, a loan where the loan-to-value (LTV) ratio exceeds 100%.
And sequential financing where homeowners pay off their mortgage every six months so they can buy new cars and other luxuries.
Once that stopped, and you couldn’t borrow that kind of money, things changed a lot.
More than Half of Recent Loans Made When Fixed Rates Hit Record Lows
Now let’s consider that the loan amount today is a 30 year loan with an interest rate ranging from 2 to 4%.
It’s actually the complete opposite of what we were seeing at the time in terms of credit quality.
In addition, many of these homeowners have very low LTVs because they bought their properties before the big run in prices.
So they are sitting on some cheap fixed payments that are often cheaper than renting a comparable home.
In other words, Their mortgage is the best in town and they will be hard pressed to find a better option.
There has also been less construction since 2010, meaning low supply has kept low demand in check.
Conversely, in 2008 mortgages were often a bad deal and clearly unsustainable, while renting could be a cheaper alternative.
Homeowners had no equity, and in many cases poor equity, combined with bad credit to begin with.
Said loan was usually an adjustable rate mortgage, or worse, an option ARM.
So the landlords had very little reason to stick around. A loan they couldn’t afford, a home that was worthless, and some very expensive housing. It’s hiring.
There Are New Risks In The Real Estate Market To Consider Today
They say that history does not repeat itself, but it has a rhythm. Yes, it’s just an idea, but it’s worth checking out what’s different today but it’s still a concern.
It would be unfair to completely ignore the risks facing the housing market at the moment.
And while it’s not 2008 anymore, there are a few challenges we need to discuss.
Another problem is that all other costs have increased significantly. We’re talking about car payments, insurance, groceries, and all other random needs.
For example, you have homeowners insurance that may have gone up by 50% or more.
You have homeowners whose insurance has dropped and who need to go into an expensive state program.
You have skyrocketing property taxes. You have more expensive maintenance, increased HOA fees, etc.
So while mortgages may be cheaper (and fixed), everything else has gone up in price.
Simply put, the likelihood of financial stress increases, even if it’s not related to the mortgage itself.
This means that homeowners are facing storms, but they are different challenges than in the early 2000s.
What would be the result? It’s not clear yet, but homeowners who bought before 2021 and earlier may be in pretty good shape.
Between record low mortgage rates and house prices that were much lower than today’s prices, there isn’t much to complain about.
Recent Home Buyers May Be in a Difficult Situation
You can see in the chart above that mortgage volume is declining as mortgage rates peak in early 2022.
This actually a good thing because it tells you that we have a mortgage loan today.
If the loans continue to be made at high rates, it will show that the mortgages due to the previous housing crisis were not working.
So that’s one big safety net. Very few loans have been established recently. But there are still millions of home buyers from 2022 onwards.
And they can be in a different boat. Perhaps the highest loan amount due to the high purchase price.
With a high mortgage rate, the possibility of a short-term purchase that will reset to high. Not to mention high property taxes, expensive insurance premiums.
For some of these people, one could argue that renting may be a better option.
It would actually be cheaper to rent the same place in some of these cities across the nation.
The problem is, it can also be difficult to sell if you are a recent home buyer because the available cash may not cover the balance.
It doesn’t mean that a short sale will make a huge return, but you can have pockets when there is enough downward pressure on home prices that a traditional sale no longer works.
Another thing that stands out this season is the abundance of short term rentals (STRs).
Some metros have a lot of STRs like Airbnbs and those markets have gotten very competitive and crowded.
For some of these homeowners, they may be interested in jumping ship if vacancy rates continue to rise.
Of course, most probably bought when prices were very low and they have those very low mortgage rates.
So it’s not clear how much of a problem you’d have if a few launched at the same time.
Housing Affordability Today Worse Than 2006
Still, there are risks, especially with affordability worse than in 2006, per ICE.
But given that funding has been tight and loan rates so low recently, it still seems hard to see a big drop.
That being said, real estate is always local. There will be cities under more pressure than others.
It will also be an important year for home builders, who have seen their housing stock rise.
If anything, I will be watching the housing market closely as we head into 2025 as these developments continue.
However, I wouldn’t worry too much just yet because it’s still a matter of not being able to buy. And it’s not a financial crisis like it was then, which often drives bubbles.
Before creating this site, I worked as an account manager for a real estate broker in Los Angeles. My experiences in the early 2000s inspired me to start writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the mortgage process. Follow me on Twitter for the latest.
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