Why Today’s Real Estate Market Is Different than the crash 15 years ago.

Why This Housing Market Is Not a Bubble Ready To Pop

Why This Housing Market Is Not a Bubble Ready To Pop | MyKCM

Homeownership has become a major element in achieving the American Dream. A recent report from the National Association of Realtors (NAR) finds that over 86% of buyers agree homeownership is still the American Dream.

Prior to the 1950s, less than half of the country owned their own home. However, after World War II, many returning veterans used the benefits afforded by the GI Bill to purchase a home. Since then, the percentage of homeowners throughout the country has increased to the current rate of 65.5%. That strong desire for homeownership has kept home values appreciating ever since. The graph below tracks home price appreciation since the end of World War II:

Why This Housing Market Is Not a Bubble Ready To Pop | MyKCM

The graph shows the only time home values dropped significantly was during the housing boom and bust of 2006-2008. If you look at how prices spiked prior to 2006, it looks a bit like the current spike in prices over the past two years. That may lead some people to be concerned we’re about to see a similar fall in home values as we did when the bubble burst. To help alleviate those worries, let’s look at what happened last time and what’s happening today.

What Caused the Housing Crash 15 Years Ago?

Back in 2006, foreclosures flooded the market. That drove down home values dramatically. The two main reasons for the flood of foreclosures were:

1. Many purchasers were not truly qualified for the mortgage they obtained, which led to more homes turning into foreclosures.
2. A number of homeowners cashed in the equity on their homes. When prices dropped, they found themselves in an underwater situation (where the home was worth less than the mortgage on the house). Many of these homeowners walked away from their homes, leading to more foreclosures. This lowered neighboring home values even more.

This cycle continued for years.

Why Today’s Real Estate Market Is Different

Here are two reasons today’s market is nothing like the one we experienced 15 years ago.

1. Today, Demand for Homeownership Is Real (Not Artificially Generated)

Running up to 2006, banks were creating artificial demand by lowering lending standards and making it easy for just about anyone to qualify for a home loan or refinance their current home. Today, purchasers and those refinancing a home face much higher standards from mortgage companies.

Data from the Urban Institute shows the amount of risk banks were willing to take on then as compared to now.

Why This Housing Market Is Not a Bubble Ready To Pop | MyKCM

There’s always risk when a bank loans money. However, leading up to the housing crash 15 years ago, lending institutions took on much greater risks in both the person and the mortgage product offered. That led to mass defaults, foreclosures, and falling prices.

Today, the demand for homeownership is real. It’s generated by a re-evaluation of the importance of home due to a worldwide pandemic. Additionally, lending standards are much stricter in the current lending environment. Purchasers can afford the mortgage they’re taking on, so there’s little concern about possible defaults.

And if you’re worried about the number of people still in forbearance, you should know there’s no risk of that causing an upheaval in the housing market today. There won’t be a flood of foreclosures.

2. People Are Not Using Their Homes as ATMs Like They Did in the Early 2000s

As mentioned above, when prices were rapidly escalating in the early 2000s, many thought it would never end. They started to borrow against the equity in their homes to finance new cars, boats, and vacations. When prices started to fall, many of these homeowners were underwater, leading some to abandon their homes. This increased the number of foreclosures.

Homeowners didn’t forget the lessons of the crash as prices skyrocketed over the last few years. Black Knight reports that tappable equity (the amount of equity available for homeowners to access before hitting a maximum 80% loan-to-value ratio, or LTV) has more than doubled compared to 2006 ($4.6 trillion to $9.9 trillion).

The latest Homeowner Equity Insights report from CoreLogic reveals that the average homeowner gained $55,300 in home equity over the past year alone. Odeta Kushi, Deputy Chief Economist at First American, reports:

“Homeowners in Q4 2021 had an average of $307,000 in equity – a historic high.”

ATTOM Data Services also reveals that 41.9% of all mortgaged homes have at least 50% equity. These homeowners will not face an underwater situation even if prices dip slightly. Today, homeowners are much more cautious.

Bottom Line

The major reason for the housing crash 15 years ago was a tsunami of foreclosures. With much stricter mortgage standards and a historic level of homeowner equity, the fear of massive foreclosures impacting today’s market is not realistic.

Remote work trends allow so many options for home buyers.

Remote Work Trends Mean Flexibility for First-Time Homebuyers

Remote Work Trends Mean Flexibility for First-Time Homebuyers | MyKCM

Today’s low inventory can be challenging for homebuyers, especially if you’re looking to purchase your first home. But if you’re one of many people who work remotely, you may have a great opportunity to use the flexibility you have at work to achieve your homebuying goals this year.

In a recent report, Arch Capital Services explains how the ongoing trend of remote work can open up more options for homebuyers:

“. . . This will enable those who are able to work from home on a part-time or hybrid basis to move slightly farther away from job centers. . . . For workers who secure full-time remote jobs, their place of residence will be determined by affordability and personal preferences.”

Basically, working from home is great news if you’re a first-time buyer trying to find a home that meets your needs and budget. Here’s a deeper look at how it could benefit you.

Extra Flexibility in Your Career Means Extra Flexibility in Your Home Search

If your job is 100% remote, you don’t have to be tied to a specific location or office. So, if you’ve been having a hard time finding what you want in your local area, it may be time to expand your search.

One option you could consider is moving to a place where you’ve always wanted to live, like the mountains, beach, or closer to loved ones. When you broaden your search radius to include those locations, it’ll give you additional homes to consider.

It could also allow you to search for a more affordable location where you have more options in your price range. This can help you achieve two goals – saving money and finding additional features that meet your needs. To truly highlight this benefit, a recent First American article discusses the great ways remote work can really help you with your homebuying goals. Ksenia Potapov, Economist at First American, says:

“For potential first-time home buyers, leveraging their house-buying power in more affordable markets can also help them buy more attractive homes – more square footage and rooms, more options for different home styles and neighborhood amenities – increasing the opportunity to find a home that suits their preferences.”

That means you can use your work flexibility to search for homes with the amenities you need at a lower price point.

Bottom Line

Remote work doesn’t just give you expanded flexibility for your career. If you’re no longer tied to a location because of your office, you have a great opportunity to expand your housing search. Let’s connect to explore how this can open up your options.

What is holding you back?

Buying a Home Is Still Affordable

Buying a Home Is Still Affordable | MyKCM

The last year has put emphasis on the importance of one’s home. As a result, some renters are making the jump into homeownership while some homeowners are re-evaluating their current house and considering a move to one that better fits their current lifestyle. Understanding how housing affordability works and the main market factors that impact it may help those who are ready to buy a home narrow down the optimal window of time in which to make a purchase.

There are three main factors that go into determining how affordable homes are for buyers:

  1. Mortgage Rates
  2. Mortgage Payments as a Percentage of Income
  3. Home Prices

The National Association of Realtors (NAR) produces a Housing Affordability Index. It takes these three factors into account and determines an overall affordability score for housing. According to NAR, the index:

“…measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.”

Their methodology states:

“To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment.”

So, the higher the index, the more affordable it is to purchase a home. Here’s a graph of the index going back to 1990:Buying a Home Is Still Affordable | MyKCMThe blue bar represents today’s affordability. We can see that homes are more affordable now than they’ve been at any point since the housing crash when distressed properties (foreclosures and short sales) dominated the market. Those properties were sold at large discounts not seen before in the housing market for almost one hundred years.

Why are homes so affordable today?

Although there are three factors that drive the overall equation, the one that’s playing the largest part in today’s homebuying affordability is historically low mortgage rates. Based on this primary factor, we can see that it’s more affordable to buy a home today than at any time in the last eight years.

If you’re considering purchasing your first home or moving up to the one you’ve always hoped for, it’s important to understand how affordability plays into the overall cost of your home. With that in mind, buying while mortgage rates are as low as they are now may save you quite a bit of money over the life of your home loan.

Bottom Line

If you feel ready to buy, purchasing a home this summer may save you a significant amount of money over time based on historical affordability trends. Let’s connect today to determine if now is the right time for you to make your move.

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It’s OK, Do not Panic!!!

There’s No Reason To Panic Over Today’s Lending Standards

There’s No Reason To Panic Over Today's Lending Standards | MyKCM

Today, some are afraid the real estate market is starting to look a lot like it did in 2006, just prior to the housing crash. One of the factors they’re pointing to is the availability of mortgage money. Recent articles about the availability of low down payment loans and down payment assistance programs are causing fear that we’re returning to the bad habits seen 15 years ago. Let’s alleviate these concerns.

Several times a year, the Mortgage Bankers Association releases an index titled The Mortgage Credit Availability Index (MCAI). According to their website:

“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is…a summary measure which indicates the availability of mortgage credit at a point in time.”

Basically, the index determines how easy it is to get a mortgage. The higher the index, the more available mortgage credit becomes. Here’s a graph of the MCAI dating back to 2004, when the data first became available:There’s No Reason To Panic Over Today's Lending Standards | MyKCMAs we can see, the index stood at about 400 in 2004. Mortgage credit became more available as the housing market heated up, and then the index passed 850 in 2006. When the real estate market crashed, so did the MCAI (to below 100) as mortgage money became almost impossible to secure. Thankfully, lending standards have eased somewhat since. The index, however, is still below 150, which is about one-sixth of what it was in 2006.

Why did the index rage out of control during the housing bubble?

The main reason was the availability of loans with extremely weak lending standards. To keep up with demand in 2006, many mortgage lenders offered loans that put little emphasis on the eligibility of the borrower. Lenders were approving loans without always going through a verification process to confirm if the borrower would likely be able to repay the loan.

Some of these loans offered attractive, low interest rates that increased over time. The loans were popular because they could be obtained quickly and without the borrower having to provide documentation up front. However, as the rates increased, borrowers struggled to pay their mortgages.

Today, lending standards are much tighter. As Investopedia explains, the risky loans given at that time are extremely rare today, primarily because lending standards have drastically improved:

“In the aftermath of the crisis, the U.S. government issued new regulations to improve standard lending practices across the credit market, which included tightening the requirements for granting loans.”

An example of the relaxed lending standards leading up to the housing crash is the FICO® credit score associated with a loan. What’s a FICO® score? The website myFICO explains:

“A credit score tells lenders about your creditworthiness (how likely you are to pay back a loan based on your credit history). It is calculated using the information in your credit reports. FICO® Scores are the standard for credit scores—used by 90% of top lenders.”

During the housing boom, many mortgages were written for borrowers with a FICO score under 620. Experian reveals that, in today’s market, lenders are more cautious about lower credit scores:

“Statistically speaking, 28% of consumers with credit scores in the Fair range are likely to become seriously delinquent in the future…Some lenders dislike those odds and choose not to work with individuals whose FICO® Scores fall within this range.”

There are definitely still loan programs that allow a 620 score. However, lending institutions overall are much more attentive about measuring risk when approving loans. According to Ellie Mae’s latest Origination Insight Report, the average FICO® score on all loans originated in February was 753.

The graph below shows the billions of dollars in mortgage money given annually to borrowers with a credit score under 620.There’s No Reason To Panic Over Today's Lending Standards | MyKCMIn 2006, mortgage entities originated $376 billion dollars in loans for purchasers with a score under 620. Last year, that number was only $74 billion.

Bottom Line

In 2006, lending standards were much more relaxed with little evaluation done to measure a borrower’s potential to repay their loan. Today, standards are tighter, and the risk is reduced for both lenders and borrowers. These are two very different housing markets, so there’s no need to panic over today’s lending standards.