In 2006 foreclosures flooded the market and that dramatically decreased home values. The two main reasons for the flood of foreclosures were:
- Many purchasers were not truly qualified for the mortgage they obtained, which led to more homes turning into foreclosures.
- Many homeowners cashed in the equity on their homes. When prices dropped, they found themselves in a situation where their home was worth less than the mortgage on the home. Many of these homeowners walked away from their homes. This lead to more foreclosures and lowered home values even more.
This cycle continued for years.
Why Today’s Real Estate Market is Different
Today’s market is nothing like the one we experienced 15 years ago and here’s why:
- Today, Demand for Homeownership is Real (Not Artificially Generated)
Leading up to 2006, banks were creating artificial demand by lowering lending standards. This made it easy for just about anyone to qualify for a home loan or to refinance their current home. Today, purchasers and those wanting to refinance a home face higher standards from mortgage companies.
There’s always risk when a bank lends money. However, heading up to the housing crash15 years ago, lending institutions took on much greater risks in both the person and the mortgage product offered. This 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 a home due to the worldwide pandemic. Also, lending standards are much stricter in the current lending environment. Purchasers can afford the mortgage they’re taking on, so there is less concern about possible defaults. 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. - People are not Using their Homes as ATMs
As mentioned above, when prices were rapidly escalating in the early 2000s, many thought it would never end. They began to borrow against the equity in their homes to finance new cars, boats, vacations, etc. When prices started to fall, many of these homeowners were underwater, leading some to abandon their homes. This increased the number of foreclosures.
The latest Homeowner Equity Insights report from CoreLogic reveals that the average homeowner gained $55,300 in home equity over the past year alone.
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 more cautious.
Bottom Line: The major reason for the housing crash 15 years ago was a tsunami of foreclosures. Now, with much stricter mortgage standards, and a historic level of homeowner equity, the fear of massive foreclosures impacting today’s market is not realistic.
For more information, contact Penny at (206) 618-5123 or email me at Penny@TheOriginalPenny.com.
Article courtesy of Crew, K.C.M (2022, April 22
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