Why This is not a Housing Bubble

1. Houses are not unaffordable like they were during the housing boom.The affordability formula has three components:
   1. the price of the house,
   2. wages earned by the purchaser, and
   3. the mortgage rate available at the time.

   Lending standards say a purchaser should not spend more than 28% of their gross income on their mortgage.  Fifteen years ago, prices were high, wages were low, and mortgage rates were over 6%.  Today prices are still high.  Wages, however, have increased and the mortgage rate, is still well below 6%.  This means the average purchaser today pays less of their monthly income toward their mortgage payment.

2. Mortgage standards were more relaxed during the boom.During the housing bubble it was much easier to get a mortgage than it is today.  For example, mortgages, grated to purchasers with credit scores under 620 were considered subprime borrowers due to their high credit risk.  Mortgage standards today are nothing like they were the last time.  Purchasers are more qualified in today’s market.
3. The foreclosure situation is nothing like it was during the crash.

   The most obvious difference is the number of homeowners that were facing foreclosure after the housing bubble burst.  There is no doubt the 2020 and 2021 numbers are impacted by the forbearance program which was created to help homeowners facing uncertainty during the pandemic.  There are fewer homeowners left in the program today, and most will be able to work out a re-payment program with their lenders.  There are fewer foreclosures now because homeowners are equity rich, not tapped out.  In the run-up to the housing bubble, homeowners were using their homes as personal ATM machines, withdrawing their equity once it built up.  When values fell, homeowners were in a negative equity situation, owing more than their mortgage value.  This lead to foreclosures and short sales.

4. We don’t have a surplus of homes on the market – we have a shortage.

   The supply of inventory needed to sustain a normal market is 6 months.  More than that will cause prices to depreciate, less than that will lead to continue price appreciation.  Today’s shortage of inventory is causing acceleration in home values.

Article courtesy of Keeping Current Matters

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