Realty News

This housing downturn is not like the previous one.

Jan 7, 2023

As quickly as mortgage rates are rising, the once red-hot housing market is cooling off. Home prices are still historically high, but there is concern now that they will ease up as well.

All of this makes people wonder: Is today's housing sector in the same predicament it was a decade ago, before the 2007-08 crash that caused the Great Recession.

The short answer to this question is no. America's housing market is in far better health today. The new lending regulations that resulted in the meltdown are partly responsible for this. Those rules put today's borrowers on far firmer footing.

For the 53.5million home mortgages with first lien, the average FICO score of the borrower is 751. It was 699 for 2010, two years after the financial industry's collapse. Lenders have been stricter in lending, and this is evident in credit quality.

The pandemic-fueled growth in home prices over the past 2 years has also contributed to a rise in home prices. That gives today's homeowners record amounts of home equity. Black Knight, an online mortgage technology and data provider, reports that the so-called tappable Equity, which is the amount of cash one borrower can take out from their home while still leaving 20% equity in paper, hit a record $1.1 trillion this year. That's a 34% increase from a year ago.

The homeowner's leverage, or the amount of debt they have against their home's value has also dropped dramatically.

Total mortgage debt in the United States is now less than 43% of current home values, the lowest on record. Negative equity, or when a borrower owes a greater amount on the loan that the home is worth is virtually nonexistent. Compare this to the fact that nearly one in four borrowers were in financial distress in 2011. Only 2.5% borrowers have less equity than 10% in their homes. All of this provides a huge cushion should home prices actually fall.

There are fewer risky loans

There are approximately 8% of active loans at the moment that have adjustable-rate mortgages. This is the lowest ever recorded volume. ARMs can be fixed, usually for terms of five, seven or 10 years.

The ARMs accounted for 36% in mortgages in 2007, right before the housing crash. The underwriting for these types of loans was poor at best. But new regulations in the wake of the housing crash changed the rules.

Today's ARMs are not only fully indexed, but over 80% of ARM originations today also have a fixed rate for the first seven-ten years.

A sign posted outside a Hercules house on Tuesday May 31, 2022. With mortgage rates at their highest level in over a decade, homebuyers are now facing an increasing affordability crisis.

Getty Images

Today, 1.4 million ARMs are currently facing higher rate resets, so given higher rates, those borrowers will have to make higher monthly payments. This is unquestionably a danger. But, in 2007, about 10 million ARMs were facing higher resets.

Mortgage delinquencies are low

Only 3% of mortgages are due and mortgage delinquencies now stand at an all-time low. Despite the rapid rise in delinquencies over the first year after the pandemic the amount of mortgages that are past due is much lower than the level before it. Pandemic-related loan forgiveness programs helped millions, but 645,000 borrowers are still in those programs.

"The mortgage market is on very historically strong footing," said Andy Walden, vice president of enterprise research at Black Knight. "Even the millions who took out forbearance to escape the pandemic, most homeowners have been doing well since then."

However, there are approximately 300,000 borrowers that have exhausted pandemic-related forgiveness programs but are still in default. In addition, while mortgage delinquencies are still historically low, they have been trending higher lately, especially for more recent loan originations.

Walden stated that they will be keeping an eye on the progress of this population.

According to the Mortgage Bankers Association (MBA), mortgage credit availability is much lower than it was before the pandemic. This suggests that standards are still tight. The Mortgage Bankers Association says that lenders have lost around half of their business because rates started rising. This could suggest that they will be more aggressive in lending to less creditworthy borrowers.

Black Knight reports that the most pressing problem in the market for housing is now home affordability. It is at an all-time low in at least 44 major metropolitan areas. Even though inventory is on the rise, it's still less than half what it was pre-pandemic.

"Rising inventory is going to eventually slow down home price growth, however, the double-digit pace so far has shown remarkable sticking capacity," said Danielle Hale of, chief economist. "As higher housing costs begin to max out some buyers' budgets, those who remain in the market can look forward to relatively less competitive conditions later in the year."

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