With the real estate market experiencing surging prices, very low inventories, and a backlog of new home construction, many consumers are wondering if what’s gone up must come back down — in other words, are we headed for another housing market crash? Let’s take a look.
Memories of the Great Recession Are Still Fresh
Few people foresaw the housing market crash 15 years ago that ignited a worldwide recession. Fueled by low-interest rates, loose mortgage lending standards, and the nation’s unshakeable faith in homeownership, home values rose at record rates year after year. When the housing bubble burst, some nine million families lost their homes to foreclosure or short sale between 2006 and 2014. Housing values plunged 30% or more, homeowners lost a collective $7 trillion, and it took nearly a decade for most markets to recover. Even today, several local real estate markets have not fully recovered.
With the robust market activity, we’ve seen lately, are we in for a repeat housing market crash? The short answer is “not likely.” Today’s mini-boom cannot be sustained, but a crash as serious as the last one is highly unlikely because of a few determining factors:
#1: Higher Lending Standards
Loose and downright shady mortgage lending practices ultimately brought down some of the nation’s largest banks and mortgage companies. The fallout forced Congress and federal regulators to make significant adjustments that have since fundamentally changed how mortgage lending is regulated.
Since then, standards have been raised and the process of obtaining a mortgage is now more transparent. “Anyone can get one” types of loans are illegal, while borrowers must undergo rigorous income and asset checks. An entirely new regulatory agency, the Consumer Financial Protection Bureau, was created to enforce this new regulatory framework. Lenders who do not comply with these standards risk severe penalties. Be sure you use a good lender.
As a result, the housing finance marketplace is now more robust and safe than it was 15 years ago. Any dip in the housing market will be cushioned by these stricter regulations.
#2: Pandemic Mortgage Forbearance
When the housing market crashed in 2007, the influx of foreclosures pumped housing supply into areas with falling prices and weak labor markets, while also preventing recently-foreclosed borrowers from re-entering the market as buyers. According to the Federal Reserve, foreclosures during a time of high unemployment could depress prices, plunging homeowners across the country deeper into negative equity.
However, in the pandemic era, the effects of mass unemployment bear little resemblance to the Great Recession, thanks in large part to forbearance programs that have allowed homeowners to postpone their monthly mortgage payments without suffering penalties.
As of early March 2021, 2.6 million homeowners’ mortgages were in such forbearance plans. As the pandemic economy has slowly recovered, many homeowners have since resumed their employment, and thus their home payments. According to CoreLogic, by the end of 2020, overall mortgage delinquencies declined 5.8% due to the forbearance program. The share of mortgages 60 to 89 days past due declined to 0.5%, lower than 0.6% in December 2019.
It’s worth noting, however, that serious delinquencies — defined as 90 days or more past due, including loans in foreclosure — increased when owners who owed large amounts left forbearance. By year-end 2020, the serious delinquency rate was 3.9%, up from 1.2% in December 2019.
Some owners in forbearance will fail to secure a loan modification or a longer repayment period from their lenders. Unless the government provides a bailout for these beleaguered owners, they will lose their homes when forbearances end. ATTOM Data Solutions expects at least 200,000 defaults in 2021 and a 70% increase in foreclosures over the subsequent two years ─ a significant increase from current levels, but a far cry from the 6 million foreclosures following the 2007 crash.
#3: The Cushion of Homeowners’ Equity
Equity is the difference between the current market value of your home and the amount you owe on it. In other words, it’s the portion of your home’s value that you actually own. Equity can be an incentive to stay in your home longer; if prices rise — something we’ve seen almost universally across the country in recent months — your equity increases, too.
Why does this matter? Simply put, higher levels of equity cushion homeowners from default when home values fall.
Over the past decade, American homeowners have enjoyed housing stability and growth, building up large home equity reserves. In the third quarter of 2020, the average family with a mortgage had $194,000 in home equity, and the average homeowner gained approximately $26,300 in equity over the course of the year. In contrast, 2009 saw nearly a quarter of the nation’s mortgaged homes valued for less than the amount their owners actually owed on those mortgages.
Factor #4: Price Growth Will Slow, But Not Stop
The sales boom following the outbreak of the COVID-19 pandemic in April 2020 surprised many real estate economists; like most other business sectors, real estate was expected (if not required in many locations) to lockdown. But by mid-April, sales were soaring as buyers, many of them millennials, took advantage of record-low mortgage interest rates. Through the remainder of 2020, rates remained below 3%, and existing home sales reached their highest level in 14 years.
The combination of solid sales and depleted supplies drove the nation’s median existing-home price for all housing types to $309,800, up 12.9% from December 2019 and marking 106 straight months of year-over-year gains.
The multi-year run of significant price increases will end, at least temporarily, but inflationary pressure on entry-level homes will continue in most markets until new home construction will relieve it. Economists at Fannie Mae, Freddie Mac, the Mortgage Bankers Association, and the National Association of Realtors forecast median prices will rise between 3 to 8% in 2021, a significant drop from 2020 but nothing like the crash in prices seen in the last housing crash. I’m making a prediction from what we have seen so far this year, we’ll be well above those numbers. I would suggest 9 to 11%+ for the Phoenix Metro Market.
Factor #5: Low inventory
Since last spring in the greater Phoenix Metro Housing Market has been short on inventory. We have been averaging around a .5 months supply of homes. A healthy balanced market would be 3 – 4 months supply – 30,000+ homes for sale at any given time, and a good brisk market would be closer to a 2 – 3 months supply of homes. Today at this moment, we have 4,180 active homes for sale, not already under contract or sold. As soon as a property hits the market we are experiencing multiple offers of 15 – 25+ offers on a home in a 48-hour period/a weekend. If not all cash, home buyers are waving some or all contingencies and so non-refundable earnest deposits in many cases.
Two years ago, we had 5 times more homes for sale. Low inventory for any product especially when it is in high demand, causes prices to rise or stay high. Simple supply and demand. Many people are moving from places like California, NE, NW, parts of the country where taxes are higher, along with the cost of living, fewer jobs, etc. Simple economics. People go where the food is – jobs are – universities and education (ASU, UofA, NAU), and general opportunity is – perhaps even the weather.
Our climate is hot but a dry heat, unlike the south, go up north and it’s a different world from Southern AZ and Phoenix. There are all kinds of tech companies, service industry, logistical companies, manufacturing, and Luke Airforce Base brings us all branches from around the country. We also have Spring Training, PGA (Golf is huge here), and pro teams for sports. You name it, we have it – except an ocean, but we’re close to that. Some of the most sought-after luxury real estate is in the Phoenix area – Scottsdale – Paradise Valley – Carefree.
We are in a major growth and boom time here in the Phoenix area. People need to live somewhere when they move here. Builders cannot build homes fast enough and we still have plenty of land. We even have farmland. Hiking, biking, fishing, and hunting are big here, even boating. We’re always at the top of the list for the places people are moving to. This demand with low supply keeps our real estate market by itself, strong for the foreseeable future. We may see a slight slow down if interest rates rise with higher taxes and inflation, and once the Covid landlord – rules and forbearance periods end we could see a surge of homes. Right now that’s scheduled to expire, June 30th, 2021, however, there’s talk of extending that to the end of 2021.
A Moving Target
While no one can say for sure what will happen with the real estate sector, most experts are confident that we’ll experience a slight market slowdown in AZ by fall, but certainly not a crash. Still, it’s important to stay informed of market trends, consumer sentiments, and expert insights. Check back with us for updates and reach out anytime.