Sometimes I wonder about the little equity that came out of this cycle when it was still the early innings of the housing market. At least according to the next wrap.
Indeed, the volume of real estate sales has declined due to unaffordable conditions, driven by high home prices and very high mortgage rates.
But do we still need a flood of HELOCs and cash-outs before the market gets hot again?
Otherwise, it’s an unaffordable market that will likely become more affordable as mortgage rates ease, housing prices decrease, and wages rise.
Where’s the fun in that?
Homeowners were evicted in the early 2000s
If you look at mortgage debt today, it’s not as high as it was 16 or so years ago when the housing bubble popped.
It increased significantly in the early 2000s, due to rising housing prices and the reduction of capital expenditures.
And a flood of refinanced loans up to 100% LTV and beyond (125% financing anyone?).
Basically home owners and home buyers back then borrowed every penny they could, and then some.
Either they cashed out every six months at higher rates, driven by the home’s negative equity, or they took out a HELOC or home equity loan behind their first mortgage.
Many also buy investment properties with no down payment, and no paperwork.
Be that as it may, home buyers at that time were always increasing their borrowing capacity.
It was kind of a movement at the time. Your loan officer or real estate agent will tell you how much you can afford and how much you can afford. There was no reason to hold back.
If it wasn’t accessible, said income would simply be topped up to pencil it out.
Exacerbating that was faulty home valuations that allowed property values to skyrocket.
Of course, it wasn’t long before the bubble burst, and we saw an unprecedented flood of short sales and foreclosures.
Many of those mortgages were written off. And much of that money was used to buy smart toys, whether it was a new speedboat or a hummer or surprisingly, a second home or rental property.
Most of them were lost because they were unaffordable.
And it didn’t have to be because most of the loans at the time were underwritten with a stated income loan or no doc loan.
Outstanding Mortgage Debt Is Low Relative To The Early 2000s
Today, things are very different in the real estate market. Your average homeowner has a 30-year fixed mortgage. Maybe they are 15 years old.
And there’s a good chance they have a mortgage interest rate somewhere between two and four percent. Maybe less. Yes, some landlords have rates starting with “1.”
Many of them also bought their properties before the increase in prices before the pandemic.
So the national LTV is ridiculously low at less than 30%. In other words, for every $1 billion in home value, the borrower only owes $300,000!
Just look at the chart from ICE that shows the huge gap between debt and equity.
Consider your average homeowner who has a ton of unused home equity, the ability to take out a second mortgage and still maintain a large cushion.
Long story short, many existing homeowners are taking on far too little mortgage debt relative to their property values.
Despite this, we continue to suffer from the problem of insolvency. Those who haven’t bought much time can’t afford it.
Both home prices and mortgage rates are too high to qualify new home buyers.
The problem is, there isn’t much reason for house prices to go down because the existing owners are in good shape. And there are very few places available, for sale.
Given how high prices are, and how low affordability is, some think we’re in another bubble. But it’s hard to get there without funding.
And as noted, the financing was very good. It was also very strong.
In other words, it’s hard to find a widespread crash when millions of homeowners fall behind on their mortgages.
At the same time, existing homeowners are valuing their mortgages more than ever because they are so cheap.
Simply put, their current mortgage is the best option they have.
In many cases, it can be very expensive to rent or buy a replacement property. So they sat down.
Do We Need a Second Mortgage to Slow Down the Housing Market?
So how do we find another housing market risk? Well, I’ve been thinking about this lately.
Although housing is not a “problem” this time around, as it was in the early 2000s, consumers are being stretched.
There will come a time when many will need to borrow against their homes in order to cover their daily expenses.
This could mean taking out a second mortgage, such as a HELOC or home equity loan.
If you think that this happens in large numbers, you can see a situation where the loan debt explodes.
At the same time, housing prices may fluctuate and even decline in certain markets due to continued unaffordability and sluggish economic conditions.
If that happens, we could have a situation where homeowners are once again overextended, with a small amount that acts as a cushion if they fall behind on payments.
Then you can have a housing market full of properties that are very close to foreclosure, similar to what we saw in the early 2000s.
Of course, the biggest difference will still be the quality of the underlying loan.
And the original loan, which if kept constant would still cost a cheap, fixed-rate loan.
So anyway, a major housing crash seems unlikely.
Indeed, I have seen recent home buyers who did not get the lowest mortgage rate, or the lowest purchase price, from their properties.
But a large portion of the market is not that homeowner this time. Sales volume has been low as both mortgage rates are high and mortgage rates are high.
The point here is that we may be in the early innings of a housing cycle, as strange as that sounds.
That is, if you want to support you in a new mortgage debt (borrowing) this cycle.
Because if you look at the chart posted above, it’s clear that today’s homeowners are not borrowing at all.
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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