In an email conversation with a client this week he wrote, “I’m thinking about buying a second house when the housing market crashes again and renting this one out until prices go back up.”
And that’s a common theme nearly daily in conversations.
Will the US Housing Market crash like it did in 2008? Or not?
In an attempt to answer the question, I don’t want to go the route of then chief economist for the National Association of Realtors, David Lereah, who into early 2007 kept promising that ‘housing cannot crash, as demand is too high’. I could not find an exact quote, but I recall laughing out loud when I heard him say that in an interview. We were, after all, in the midst of a housing crash.
And being a mortgage loan originator, I am in the housing market, and don’t want to come off as a cheerleader for housing. I would prefer to look at actual data to help decide the future of housing.
So let’s look together at where we are with housing, and based on the facts at hand decide.
To start with, here is a graph of median home prices in the US:
The median home price is about $380K. And the median at the height, just before the crash, was about $320K. Inflation and population growth would account for some of that difference. So let’s look to see if it is sustainable.
First let’s look at interest rates. Here are median mortgage rates over the last 50 years.
Let’s say we bought a home in 2006, median home price of $320,000 at a then prevailing 6% interest rate. For this example I will assume no down payment – something you could actually do at the time, that we are financing the whole amount. The principle and interest payment is $2,202 per month.
So, let’s compare that to buying a median home in 2020 for $380,000, but with a 3% interest rate. The principle and interest payment is $1885. (Again, with the assumption that there is no down payment and we finance the entire amount – something which is very uncommon today).
Even though the loan amount increases, the payment decreased by about 6%.
And monthly payment is what matters when buying a home, much more than the price of the home. That is more affordable than prior to the housing crash.
And that is an important point about the down payment requirements today vs in 2006. Most buyers are required to bring a down payment today; and those 100% cash out refinances of 2006 are gone. Completely gone. So, that means that today we, collectively, have more equity in our homes. Take a look:
In 2006 collectively homeowners in the US had approximately $14 billion in equity in our homes. Anecdotally, I experienced that there were two schools there. The homeowners who just paid down the mortgage and did not pull equity out of their homes. And then the others, no money down to buy, then cashing out any equity they did have every couple years.
Those who did so, when they saw housing losing value around them, had nothing to lose by walking away from the home. They had not money into it and often had taken money out of the house. They felt like renters and could walk away just as easily.
I don’t mean to make light of the hart-wrenching decision to leave a home, that so many had to make at the time.
But, this time it’s different. People have equity, over $18 billion collectively, and have something, some real value, to lose. Most homeowners will hang on as long as possible to the home.
And what of the 6 million homeowners who have asked for an received a forbearance on their mortgage?
Well, that has the potential of creating a wave of foreclosures when the forbearance period is complete and all those skipped payments are due all at once. At that time the loan servicing company will decide how to handle reinstating those loans. And for the home owners who cannot bring the loan current all at once – which will be the majority – certainly some loan servicing companies may foreclose rather than work out other solutions.
But I don’t believe that will be common. Most will modify the loan, and begin collecting payments again. They will be motivated to do so in part because they know that loan will be on their books for a long time to come since most of those homeowners will have very few options to refinance. So, the loan becomes a long term asset for the servicer. That is my opinion, just observing the state of the mortgage market. Most servicers don’t want the hassle of dealing with foreclosing on a property. They are in the business of collecting and distributing payments. And if coming off forbearance a homeowner is both willing and able to start making payments again, then that is the path loan servicers will take.
And, finally, housing inventories were low, much lower than going into the housing crisis.
Homes listed for sale were down before the shutdown. And many are not listing their homes, but waiting for everything to open up again. So listings will be even lower; but demand is still holding steady and I believe will grow once things open up. The laws of supply and demand will keep home prices stable at best, and likely they will rise.
And, to compliment that chart, take a look at median rental rates:
Rents have been steadily rising, and I don’t expect that to subside. That will push more people to opt to buy rather than continuing to suffer the annual and steady rent increases.
So, will home prices fall?
In the short term, perhaps. A little.
But as the economy gets going full steam again, however that looks, I think any short term fall in home prices will be just that, short term.
So anyone in the market to buy a home right now, I would suggest taking advantage of these low rates and buying; with two caveats: that you have a stable income and therefore can assuredly make the payments, and that you plan to be in the home for the next several years. I don’t think I would be in the game of flipping a home quickly and hoping for a profit right now.
The numbers favor the housing market to maintain or quickly regain strength. And the biggest number is the amount of equity that homeowners have. They will protect that wealth, and that is the biggest difference in my opinion from the 2008 housing crash.
And as always, if you do decide that it is the right time for you to buy, my team and I would be happy to help you finance the home. Just click here to get in touch.