Bubble or Correction? We Say Correction and Here's Why
Regardless of the market, you are going to find naysayers...and sometimes those naysayers can be "loud" and really give you pause. Lately I've heard a lot of speculation about our market 'bubble' and have done significant reading on this topic. Oddly enough, KCM posted some wonderful supporting graphics that drives my point home.
THE CONCERN: Are we repeating the 2006 housing bubble, with the resulting 2008 burst and another recession?
No - Today's housing market is quite different than the bubble market we experienced twelve years ago (can you believe it's been 12 years?). These 4 points explain the differences:
- Home Prices
- Mortgage Standards
- Mortgage Debt
- Housing Affordability
1. HOME PRICES
Yes, home prices have reached and even surpassed 2006 averages in the Charlotte market. However, after more than a decade, home prices should actually be much higher, based on inflation alone.
Frank Nothaft is the Chief Economist for CoreLogic recently explained:
“Even though CoreLogic’s national home price index got to the same level it was at the prior peak in April of 2006, once you account for inflation over the ensuing 11.5 years, values are still about 18% below where they were.”
2. MORTGAGE STANDARDS
Some are concerned that banks are once again easing lending standards to a level similar to the one that helped create the last housing bubble. That couldn't be farther from the truth - in fact, today’s standards are nowhere near as lenient as they were leading up to the bubble burst.
The Urban Institute’s Housing Finance Policy Center issues a Housing Credit Availability Index (HCAI). According to the Urban Institute:
“The HCAI measures the percentage of home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.”
Today's standards are much tighter on a borrower’s credit situation and have all but eliminated the riskiest loan products.
3. MORTGAGE DEBT
We are all familiar with the stories of the homeowners who mistakenly used their homes as ATMs in 2006, withdrawing their equity and spending it with no concern for future ramifications. They piled debt on top of mortgage debt and were unable to repay these debts when the market crashed. As above (#2) explains, the mortgage standards are far higher in 2018 than they were in 2006.
The best indicator of mortgage debt is the Federal Reserve Board’s household Debt Service Ratio for mortgages, which calculates mortgage debt as a percentage of disposable personal income.
In 2006, that ratio was 7.21%, meaning that over 7% of disposable personal income was being spent on mortgage payments. Today, the ratio stands at 4.48% – the lowest level in 38 years!
4. HOUSING AFFORDABILITY
Despite the fact that both house prices and mortgage rates on the rise, the housing affordability for buyers is as well. The Housing Affordability Index, released by the National Association of Realtors, provides us data reflecting that homes are more affordable now than at any other time since 1985 (with the exception of the period immediately following the bubble burst in 2008).
IN SUMMARY
After reviewing the four key housing metrics to compare today to 2006, it is quite clear that the current market is nothing like the 2006 bubble market. So, let the naysayers be naysayers...the numbers tell the true story.
For more information on the Charlotte market or any of our local communities in the Metro region, give me a call or text at (704) 491-3310.
© Debe Maxwell | The Maxwell House Group | CharlotteBroker@icloud.com | Bubble or Correction? We Say Correction and Here's Why
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