The Housing Market Crash of 2022

I bet that headline caught your eye. It's a question I have been hearing more lately, “Is this the start of another housing crash like 2007?” For those who know me, you know that I don’t try to predict markets, because I know it's not possible. But I understand people’s fear and their desire to make sense of everything that is going on today. So, is history repeating itself?

The current economic cycle has led to vastly increased housing prices, and recent rate hikes from the Federal Reserve leave us with the highest mortgage rates we have seen in 20 years. If you are paying attention to the buzzwords the media is using today; “bear market”, “recession”, “housing bubble”, it’s hard not to think back to the 2007-2009 housing crash and the Great Recession. It’s a normal human reaction to think something will break. The harsh reality is that we won’t know for sure until it happens, or doesn’t happen. What we can do is look at the facts of where we were in 2007 and where we are today in 2022.

The Housing Market Today

With 30-year fixed mortgage rates approaching 6.5%, the higher cost of financing has made buying a home less affordable for many Americans.

This alone has caused speculation that prices will come down. In addition to rising rates, the supply of homes for sale has also increased. Recent data from Realtor.com showed the largest growth in inventory since March 2019. A recent Fannie Mae study of consumer sentiment found that a record 79% of homebuyers said it is a bad time to buy a home. The increase in supply, and potential decrease in demand could see housing prices start to lower.

Loan Structure Today vs. 2007

If we compare the current loan structure today vs. where things were in 2007-2008, there are some big differences.

1. Average Credit Score of Homebuyers From 2004 to 2007, Fannie Mae reported the average credit score for a homebuyer was 717. A March 2022 report from Fannie Mae showed that the average credit score for homebuyers today is 754. The average credit score for first-time home buyers today is 746. The average borrower today is much more stable and lending standards have changed dramatically from where they were leading up to the housing market crash and Great Recession. Gone are the days of the NINJA loan (no income, no job, and no assets).
   

2. Increase in Equity In April 2022, home equity rose to $11 trillion. That is double the previous peak in 2006. If your house is worth $400,000 and you owe $250,000 on your home loan, you are left with $150,000 equity. Tappable equity, or the amount a homeowner can borrow against while maintaining a 20% stake in their house, increased 34% from April 2021 with the average homeowner having $207,000 in tappable equity.
   

3. Decrease in Risky Loans New regulations following the 2007 housing crash has changed the way lenders are underwriting loans. In 2007 there were 13.1 million adjustable-rate mortgages (ARMs), representing 36% of all mortgages. The underwriting for those loans were sketchy at best. Home prices declined after peaking in mid-2006, making it more difficult for borrowers to refinance. ARMs began to reset at higher rates, resulting in higher monthly payments, and a higher rate of mortgage delinquencies. Today, there are 2.5 million adjustable-rate mortgages, making up about 8% of mortgages. There has been a renewed interest in an ARM as fixed rates are on the rise. Mortgage delinquencies are also at a record low. Even amid a jump in delinquencies at the beginning of the coronavirus pandemic, there are just under 3% of mortgages past due.

The Bottom Line

While there is a lot of speculation about the housing market right now, and prices coming down, many of the factors that led to the Great Recession and housing market crash just aren’t there. The current unemployment rate sits at 3.6% and the risky loans that led to the housing crash are not on the books either. Does that mean everything will be okay? Maybe not, remember we can’t predict the future. The best thing you can do is make sure you are on track for your goals, and that starts with a financial plan.

Important Information:

Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Sources:

1. Average mortgage rate is estimated based on a $300,000 loan, 20% down payment, in the state of Iowa with a 700-719 Credit Score. Mortgage rates are estimated by a third party using industry averages for owner-occupied properties and do not include refinancing options. Rates may vary based on availability and lender approval.

2. Realtor.com Real Estate Data Library https://www.realtor.com/research/data/ - Data Week Ending May 21, 2022

3. Data reported by Fannie Mae Home Purchase Sentiment Index (HPSI), May 2022

4. 2018 vs. 2008: Better Equipped for the Next Mortgage Market Downturn Fannie Mae Perspectives, September 21, 2018

5. Mortgage costs as a share of housing costs - placing the cost of credit in broader context Fannie Mae, Economic and Strategic Research Group, March 9, 2022

6. Black Knight’s Mortgage Monitor, April 2022