As the Fed continues its battle to lower inflation, concern is swirling about a crash in house prices and potentially another financial crisis.
But this time is different. Homeowners have less debt, substantial amounts of home equity and, at least for now, face much lower risk of job loss. Even though the market has cooled, in most cases potential sellers of existing homes remain in the driver’s seat. Those who don’t absolutely need to move have the option to sit out the current market or to price their homes to sell fast. That will keep inventory growth subdued. And low inventory means buyers’ options will remain limited.
Evidence suggests that a combination of labor market uncertainty and tighter credit constraints were two of the main drivers of the housing crash that prompted the global financial crisis and Great Recession. The opposite is true of the labor market and credit today.
The labor market remains very strong, with twice as many job openings than there are people actively seeking work. And years of tighter mortgage lending standards and strong home value appreciation mean that homeowners have higher credit scores and more home equity than in the past, drastically lowering the potential for desperate sellers to flood the market.
The mortgage application and origination data tell a similar story. Mortgage applications fell faster than mortgage originations in the past year, according to data from the Home Mortgage Disclosure Act. That signals that borrowers are better qualified, with higher credit scores.
This is true across mortgage products, including those that are often stigmatized for their role in the last housing downturn. When compared to the period preceding the global financial crisis, recent borrowers who applied for adjustable-rate mortgages—which have recently comprised about 12% of all mortgage applications compared with roughly 40% in 2005—have higher incomes and larger down payments than the typical loan applicant.
Lastly, U.S. households are spending less of their income servicing debt payments. The share of income spent on debt repayment is lower than before the pandemic, and mortgage delinquency rates fell to a 43-year low in the second quarter of this year.
During the housing crash, a large number of homeowners were overleveraged and could no longer afford their mortgage payments. As a result, default risk increased, credit tightened and time to sell increased because these highly indebted homeowners were less able to lower their asking prices.
Today, sellers aren’t desperate. They would only enter this market if the benefit outweighs the cost—which now includes giving up a low 30-year fixed rate mortgage for today’s much higher rate. And that means that most sellers anticipate their house will sell for less than it would have only a couple of months ago, while still selling for a lot more than it would have at the start of the pandemic. In 2008, 49% of Realtors had a client with a distressed sale; today, it’s only 1%.
In contrast with the years preceding the global financial crisis, the pandemic mortgage market wasn’t plagued with poor underwriting procedures and, in some cases, predatory practices. Today’s homeowners can simply sit out this slowing market or price their home to sell—either scenario would prevent a large surge in housing inventory.
Crain’s contributor Orphe Divounguy is a senior economist at Zillow Group and former chief economist at the Illinois Policy Institute. The views presented here do not necessarily reflect the views of his employers.
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September 22, 2022 at 08:52AM