HousingWire By Mark Fleming
Mark Fleming, chief economist for First American, breaks down the housing boom.
Annual house price growth hit a record high in 2021, over 17%, and growth remains in the double digits thus far in 2022. Homes that reach the market sell quickly, bidding wars are the new normal and the investor share of sales continues to rise. The combination of these factors has some feeling 2008 déjà vu. Yet, today’s housing market is nothing like the housing bubble of the mid-2000s.
A housing bubble can generally be defined as an unsustainable period of house price growth generated by artificial demand, as was the case in the mid-2000s when demand surged because of wider access to mortgage financing. Various mortgage finance innovations facilitated larger loans at the same monthly payment to keep up with growing home values – which is one reason why house prices kept going up.
The price growth in today’s market is driven by market fundamentals: millennials, the largest living generation, are aging into their prime home-buying years at a time when the supply of homes for sale is historically low. Prior to 2009, housing was overbuilt relative to demand. Since then, the housing market has been underbuilt, and the supply deficit has grown.
Demand driven by demographics is different than demand driven by mortgage finance innovation and “fix-and-flip” home buyers, as was the case in the mid-2000s. But today’s housing market differs from 2008 in several important ways.
Tighter mortgage underwriting: Lending standards are much tighter today than during the mid-2000s. Lenders remain more conservative, and the Dodd-Frank Act has all but eliminated speculative products, such as negative-amortization loans and “teaser” rates. Mortgage credit availability remains tighter than it was pre-pandemic. Additionally, the median credit score of borrowers approved for mortgages reached 778 in the fourth quarter of 2021, which is higher than during the previous housing boom.
Household balance sheets have improved: Since the Great Recession, mortgage rates have generally declined helping homeowners refinance into lower mortgage payments, while steadily rising home prices have significantly boosted homeowner equity.
The mortgage debt-to-income ratio is near a four-decade low and homeowner equity is at a historic high. In the fourth quarter of 2021, the national loan-to-value ratio was approximately 31%, the lowest in over three decades and significantly higher than in the fourth quarter of 2008, when it surpassed 50 percent.
The equity buffer is important becausethe housing crisis during the Great Recession was fueled heavily by the fact that job losses were paired with a significant share of homeowners who had little or no equity in their homes – otherwise known as being “underwater.”
Today, homeowners have very high levels of home equity, providing a cushion to withstand potential price declines, but also preventing housing distress from turning into a foreclosure.
In fact, if distressed homeowners are required to resolve delinquency, given their equity buffers, involuntary sales are much more likely than foreclosures. Why give your equity to the lender in a foreclosure when you can sell the home, pay off your mortgage and take that equity with you?
Housing is not overvalued: If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home. The only period when the median sale price was greater than house-buying power was from 2005 through 2007, indicating an overvaluation of housing, or a “housing bubble.” Today, house-buying power is over $100,000 greater than the median sale price of home, signifying that housing is not overvalued.
Moderation, not bust
Double-digit house price growth is not sustainable in the long-run, especially alongside fast-rising mortgage rates. As rising prices and rising mortgage rates undermine affordability, it’s natural to see some moderation in price appreciation. Some buyers will pull back from the market and sellers will adjust their price expectations, which will prompt house prices to adjust.
But the secular shortage of housing supply relative to demographically-driven demand will continue to keep house price appreciation positive. The underlying fundamental housing market conditions support a natural moderation of house prices rather than a sharp decline. We have clearly experienced a housing market boom, but that doesn’t portend the necessity of a bust.
Mark Fleming serves as the chief economist for First American Financial Corporation. In his role, he leads an economics team responsible for analysis, commentary and forecasting trends in the real estate and mortgage markets. Fleming is frequently quoted by national news outlets and industry trade publications such as The Wall Street Journal and The New York Times and he is a regular guest on high-profile broadcast news channels, including CBS, CNBC, Fox Business News and NPR.