Are We Headed For A Housing Crash?
A lot of people, both in the real estate world and not, are curious where the housing market is headed. The coronavirus put more pressure on the market as fewer people were selling, leaving inventory levels low.
When inventory is low, prices rise so long as demand still remains high, which it has.
As some areas are seeing home prices soar, the question a lot of people have now is: will the housing market crash? Let's take a look at some underlying factors, which will provide a few answers on the housing market's current state.
Today's Lending Practices
Mortgages are available to a lot of people. Rates are low. Down payment assistance programs are available to help potential homeowners get into their home for 3.5% (FHA) or lower in some cases.
The practices seem a lot like the 2006 practices that led to the market crash.
But, based on the Mortgage Credit Availability Index, which is rising, we're nowhere near the level of 2006. The index shows that we only have around 20% of the availability today that we did when the market crashed.
Lending standards today remain tighter than in 2006, with a few safeguards in place:
1. Borrowers are not often given mortgages with a credit score of under 620, although some programs offer loans for people with low scores like these.
2. Risk management has tightened, with a lot of lenders averaging in the 750s for their most recent month's credit scores.
3. Lenders remain a lot more cautious in today's market, reducing the risk that a crash will occur in the near future.
Cash-Out Refinancing in the Current Market
Cash-out refinancing has risen in the past year primarily due to the historically low-interest rates that we're seeing. People are taking out more money from their homes at lower rates, and while this would normally be a bad thing, this time, the market is different.
People are refinancing with:
1. More equity remaining in their homes, about 20% after the refinance
2. Even with owners cashing out, 2020 levels were more than 50% lower than in 2006
3. Only 33% of refinances were cash-outs in 2020 compared to 89% in 2006
While people are refinancing more in recent years, the level remains far less than in the last market crash. If they continue to increase, these figures may be a problem in the future, but they're still relatively low.
Foreclosures Are Less Likely This Time Around
An abundance of foreclosures hitting the market at the same time would cause the market to suffer significant losses. The good news is that 50% of people in forbearance that have left the program are up-to-date on their mortgages.
Banks had to undergo a massive learning process in 2008, and they found that putting all of these homes back on the market is a costly venture.
Today's banks are far more likely to work with borrowers to help them enter into a repayment plan or somehow catch up on their mortgage rather than foreclose on properties.
In general, while there may be some form of price correction in the future, the signals are not showing an imminent market crash as many people think is upon us.