Housing market on fire: 5 ways this boom has nothing to do with the latest
A decade after the housing market came out of a deep recession, housing is hot again. Indeed, the values of the house are reaching new heights.
With its double-digit appreciation and rampant bidding wars, the latter part of real estate bears some strange similarities to the latter.
“This is clearly the strongest housing market we’ve seen since the global financial crisis,” Federal Reserve Chairman Jerome Powell said recently.
However, Powell sees no evidence of a bubble, a view shared by many economists. The consensus: House values might stop skyrocketing, but they won’t collapse.
“I don’t think the prices are going to drop significantly, but they could stay stable for a while,” said Mark Zandi, chief economist at Moody’s Analytics on Wednesday.
Housing economists and mortgage specialists cite compelling reasons to believe that this housing boom will end with a soft landing rather than a crash. Five ways this real estate boom is different from the last:
1. Liar loans are long gone.
During the lending frenzy of 2005 to 2007, anyone could borrow almost any amount of money, regardless of the size of their down payment or the health of their credit scores.
Lenders have offered “no documentation” mortgages – commonly referred to as “lying loans”. And borrowers have indeed lied, sometimes at wacky levels.
In a mortgage fraud case filed in South Florida in 2008, FBI agents and federal prosecutors presented real whoppers. A part-time cashier at a grocery store inflated her income on loan applications from $ 13,000 to $ 344,000 so she could qualify for $ 1.3 million in loans on a lavish house in a gated community. Another borrower who made $ 25,000 a year as a hotel worker claimed to have made $ 594,120 to get $ 1.8 million in mortgage on a McMansion.
These are extreme examples, of course, but they reflected an era of historically loose lending standards. The Mortgage Bankers Association’s mortgage credit availability index climbed to a record high of 800 during that bubble, then fell to a fraction of that level during the crash.
Now the liar loans are gone, says Chuck Mathewson, branch manager at LowRates.com in Charlotte. “You actually have to prove your ability to repay the loan, whereas with subprimes, you don’t have to prove anything,” he says.
2. Shady lending practices are gone.
It wasn’t just buyers who pushed the boundaries in the last bubble. Lenders and mortgage brokers have engaged in all kinds of abuse.
Subprime mortgages generated large commissions for mortgage brokers and mortgage brokers forced to extend loans to borrowers they could not afford. Lenders eagerly made toxic loans, knowing they would pass them on to investors.
“The mortgage industry was really unregulated,” recalls Steve Nakash, managing partner at Cherry Creek Mortgage. “Lenders were self-regulating. Mortgage-backed securities were self-regulating. Wall Street buyers were self-regulating. It has gotten to a point where if there is no regulation, you are going to have fraud.
After the global financial crisis of 2008 and 2009, Congress intervened to curb the predatory practices that led to the crash.
Now Nakash says, “It’s almost impossible to do anything that even looks like taking advantage of the consumer.”
3. Construction cranes are fewer and more widely spaced.
During the last real estate bubble, developers engaged in a residential construction frenzy. Construction cranes dotted horizons all along the solar belt.
When the bubble burst, builders stopped building – and they didn’t pick up anything close to their pre-crash pace. Housing starts have been muted for years.
“Housing starts are still 23% below January 2006 levels, leaving the US real estate market 3.8 million single-family homes below what is needed to meet demand,” says Todd Abraham, senior portfolio manager at Federated Hermes investment bank. “There is hardly an environment conducive to overbuilding and widespread financial speculation.”
4. Price increases are happening everywhere.
During the 2005-2007 surge, house price increases were concentrated in coastal areas and a few inland cities, such as Las Vegas, Denver and Phoenix. The boom essentially skipped Texas and the Rust Belt – house prices in large parts of the country barely budged.
This time around, the house price increases are spread widely across the country. From February 2020 to February 2021, house prices jumped 13% in Cleveland, 12% in Detroit and 11% in Dallas, according to the S&P CoreLogic Case-Shiller House Price Index.
None of these markets experienced double-digit growth in the previous boom. The more evenly distributed gains reflect a housing market driven not by local speculation but by a broader imbalance of supply and demand.
5. Demographic trends are a positive wind, not a headwind.
In 2005, Gen Xers were reaching their best home buying years. There was just one problem – Gen X was not very tall, certainly not compared to the Baby Boomers that came before them.
Much of the demand during the last bubble was driven by baby boomers buying multiple homes and Gen X entrepreneurs who became real estate barons.
Today, the millennial generation is in prime time for household formation. Unlike Generation X, this is a large age cohort. According to the Pew Research Center, there are 62 million millennials, compared to just 55 million Gen Xers.
Meanwhile, the current real estate boom is accompanied by an explosion of Hispanic buyers. This group is expected to become a major force in home buying in the years to come.