The current growth in home prices is echoing the lead-up to ‘the great recession’. Is history repeating itself?
The answer is likely not, according to a recently released realtor.com® report. Building is lacking in many markets—one hallmark 10 years ago was over-construction—and credit standards are more stringent, says Danielle Hale, chief economist of realtor.com.
As we compare today’s market dynamics to those of a decade ago, it’s important to remember rising prices didn’t cause the housing crash, it was rising prices stoked by subprime and low documentation mortgages, as well as people looking for short-term gains—versus today’s truer market vitality—that created the environment for the crash. Before the crash many consumers purchased second and third homes as “investments properties” seeking to take advantage of, and cash in on rising home prices. Thus the demand for these homes was artificial and when the market realized this prices quickly sank and this effect was compounding as these non-occupant owners who had financed these purchases with zero money down loans found themselves in the position of owning homes that were worth less than what they owed on the properties. Rather than take the losses these owners simply allowed the banks to foreclose on the properties, or worked with a short sale specialist in an effort to convince their bank to agree to allow them to short sell the property (a sale in which the owners attempts to avoid foreclosure by requesting the bank agree to accept less than what is owed on the property). During the down turn it was suggested that each distressed property sale in a neighborhood decreased that value of the surrounding homes by 2-3%. In many neighborhoods over 80% of the sales were distressed sales!
In 2016, the national median home sales price was 2% higher than it was in 2006. Pre-recession prices have returned in 31 of the 50 largest metropolitan areas.
In contrast with 2006, however, are today’s credit conditions. Currently, the median FICO score for a mortgage is 734; the median in 2006 was 700.
Builds and flips are also different from 2006—starkly. The credit environment, among other factors, is keeping a lid on unfettered flipping and over-construction. In 2006, household formation generally equaled 1.4 single-family housing starts; in 2016, that number shrank to 0.7 single-family starts. Flips accounted for 5% of sales in 2016; in 2006, they comprised 8.6%.
Lending standards are critical to the health of the housing market. Unlike today, the boom’s under-regulated lending environment allowed borrowing beyond repayable amounts and atypical mortgage products, which pushed up home prices without the backing of income and equity.
Additionally, economic indicators point elsewhere. Employment was healthy then and is now, but inventory is significantly more limited today—at a 20-year low. Presently, the average months supply is 4.2; in 2007, the average months supply was 6.4.
“The healthy economy is creating more jobs and households, but not giving these people enough places to live,” Hale says. “Rapid price increases will not last forever. We expect a gradual tapering as buyers are priced out of the market—not a market correction, but an easing of demand and price growth as renting or adding roommates becomes a more affordable alternative.”
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Hilliard 43026 Lewis Center 43035 Marysville 43040 43041 New Albany 43054 Pickerington 43147 Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235
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