When comparing today’s real estate environment to that of the market leading up to the implosion of 2008, there are marked differences that still make this market an excellent time to purchase.
Back then it was a piece of cake securing financing because the regulations were so lax and if you had a pulse, the majority of lending institutions made it very easy to provide you a no documentation mortgage.
Today it is much different in qualifying for a mortgage. The Urban Institute, and I quote, “released their latest Housing Credit Availability Index which “measures the percentage of owner-occupied 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.”
The HCAI is way below the pre-crisis standard index of 12.5 of 2001-2003 for the entire mortgage market when mortgage companies were willing to tolerate much higher risk. However, today’s index is less than 5 percent which is the lowest since its inception and way within the threshold of safety.
Price appreciation in 2017 was 6.4 percent, 2018 was 4.8 percent, 2019 was 4.7 percent and 2020 9.2 percent and has been above the normal 3.8 percent (Corelogic.com) but it is still within an acceptable range based on the run-up of prices from 2002-2005 of 8.5 percent, 8.7 percent, 12.5 percent and 11.4 percent.
As you can see prices have increased substantially but not going out of control as they did in the early 2000s.
Another factor in today’s strong market appreciation is that we are not in a surplus housing market like we were back then, but a deficit housing market.
Again as an example of past history, in 2004 we had 3.9 months of housing inventory, 2005 5 months, 2006 6.4 months and 2007 9.6 months; where a normal market has 6-7 months of inventory. This caused the blowup of the housing market as more and more inventory came onto the market. However, in 2017 we had 4 months of inventory, 2018, 3.7 months, 2019, 3 months and 2020 2.1 months.
You can easily see that right now there is no housing bubble. Historically low interest rates have caused price increases way above the inflation rate of less than 2 percent.
Another factor in why the market is not overheating is that new construction, especially on Long Island, is considerably less than from 2005-2010 increases where there was excessive building as the market demand was sliding. We have had 13 years of construction that has been lower than the 50-year average as per the Census bureau.
Here on Long Island especially in Nassau with the continued lack of land to build on, prices will continue to increase until there is either less demand or increases in interest rates, thereby pricing more and more out of the market.
There are those who are in a position to buy and knock down the existing home to build a new one. As mentioned in last week’s column Suffolk had a 23+ percent increase in prices; as there is a greater supply of land to build upon in that location.
Prices are considerably lower there which is another reason for even greater demand having more families moving in that direction. Obviously, the 400,000-plus who left NYC in 2020 greatly assisted in the amazing sales increases during the 3rd and 4th quarters as it put pressure for price appreciation to be double digits out there.
For many, higher prices have not discouraged them from purchasing. One reason is that their wages are higher than during the run-up in prices back in the early 2000s and interest rates are half of what they were back then.
The percent of median income that was needed from 1985-2000 was 21.2 percent, in 2006 it was 25.4 percent and today is 14.9 percent. This has added to the pent-up demand for housing which was acerbated by the Covid-19 Pandemic, which exploded the demand in the last 2 quarters of 2020.
Also added to the mix are those families and singles that continue to enter the market every year who are income and creditworthy. Mark Fleming, chief economist for First American, explains,
“Lower mortgage interest rates and rising incomes correspond with higher house prices as home buyers can afford to borrow and buy more. If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home. Looking back at the bubble years, house prices exceeded house-buying power in 2006, but today house-buying power is nearly twice as high as the median sale price nationally.”
Today, over 50 percent of homes have over 50 percent equity and are on much more solid ground than back 15 years ago.
They used their equity as a piggy bank as back then, drawing down their equity as many did. Then prices collapsed and so many had decreased their values less than the mortgaged amount and became, as they say, “underwater.”
Lastly, today homeowners are not refinancing and taking out as much equity as they did years ago. In 2005 total equity of 263 billion was cashed out, 2006, 321 billion and 2007, 240 billion. In 2018, 87 billion, in 2019, 108 billion and 2020, 153 billion.
So overall homeowners and purchasers are in considerably better financial condition than ever before. However, the future of our housing market will be determined by the balance between the demand going forward and increases in mortgage rates over the next few years as well as the housing supply. No one has a crystal ball, but for the time being things are very good for sellers and buyers.
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