When Is the Market Going to Tank?
There’s nothing like ending a long week with a lazy late-in-the-day martini and a conversation you force upon someone else about doomsday cults or the three hour deep dive you recently went on concerning the commercialization of Mount Everest. Against your best attempts to steer the discussion away from work and instead stuff it with sinister fluff, your companion casually drops, “So when do you think the real estate market is going to crash?” Asking that to a real estate broker is like asking a dog owner, “When you think your adorable cockapoo puppy you’ve poured your entire life into is going to finally swallow a chocolate bar and die?”
This is not to discount how traumatizing national crises are and any whiff of a repeat sends the populous into a tail spin, regurgitating exaggerated troubling memories and projecting them out into the foreseeable future. Sensationalized headlines only pour kerosine onto this hysteria, using pure pathos to rip logic out of the equation and turn up the emotions to a fever pitch.
To set the record straight here, this is not a repeat of the 2007 crash – not even close. So please slowly back off the ledge and join us on ground level so we can unravel you from the wild tangle of alarmist headlines you’ve seemed to have gotten yourself ensnared in.
To kick the conversation off, let’s begin with some hard facts from CNBC in order to highlight why this current housing re-balancing is not the same as the 2007 crash:
1. New lending regulations that resulted from that meltdown put today’s borrowers on far firmer footing. Of the 53.5 million first lien home mortgages in the USA today, the average borrower FICO credit score is a record high 751. It was 699 in 2010, 2 years after the financial sector’s meltdown. Lenders have been much more strict about lending, much of that reflected in credit quality.
2. Today’s homeowners have record amounts of home equity. Tappable equity hit a record high of $11 trillion collectively this year, a 34% increase from 2021.
3. Mortgage debt in the US is now less than 43% of current home values, the lowest on record. Negative equity is virtually nonexistent. 25% of borrowers who were under water in 2011. Now just 2.5% of borrowers have less than 10% equity in their homes.
4. There are currently 2.5 million adjustable-rate mortgages outstanding today…about 8% of active mortgages, the lowest volume on record. In 2007, just before the housing market crash, there were 13.1 million ARMs, representing 36% of all mortgages. More than 80% of today’s ARM originations also operate under a fixed rate for the first 7-10 years.
5. While 1.4 million ARMs are currently facing higher rate resets, those borrowers will have to make higher monthly payments. In 2007, about 10 million ARMs were facing higher resets.
6. Mortgage delinquencies are now at a record low, with just under 3% of mortgages past due.
One key differentiator between the market prior to 2008 and today is that the Fed gave the biggest U.S. banks a clean bill of health in its annual stress test, saying they’d be able to continue lending to households and businesses even in a severe recession. The test measured the 34 biggest banks’ ability to maintain strong capital levels in a hypothetical recession marked by sharply higher unemployment and a steep decline in stock prices. The banks subject to the test remained above their minimum capital requirements in the test’s worst-case scenario, though they would collectively lose more than $600 billion.
And we also must not forget that we have been embroiled in a very low inventory, high demand market for years now…even since pre-covid. Economists echo that there are grounds for optimism over housing. The past 24 month’s price run-up was driven primarily by rock-bottom rates and evolving consumer preferences for more space, not the loosened lending standards or excessive risk-taking that culminated in the 2008-09 crisis. Our supply of homes has been and remains to be quite tight.
To further compound this low inventory for New Yorkers specifically, a recent survey found that more people are moving into Manhattan than before the pandemic, creating a surge in demand that’s causing many rents and home prices to spike. Between 2000 and 2020, New York City grew by more than 800,000 residents, according to the Census Bureau. In that same time period, only 438,088 apartments and single-family homes were built.
One of the most alarming things for me as a broker is that many people have seemed to forget that the low interest rate we’ve experienced the last two years were abnormal and were always meant to be temporary. “Historic lows” are not sustainable and are well below prior, perfectly healthy markets where higher rates weren’t questioned. Unfortunately, people reestablished these rates as the norm, so anything higher than 3% now seems astronomical. Flashing back to the past, rates began to rise after 2016 and reached their peak at the end of 2018/start of 2019 as employment and the overall economy was strong and growing. Politicians decried the Fed’s rate hikes back then. Rates on a 30-year fixed rate mortgage (FRM) ran between 3.95% on the low end and 5.34% on the high end, which are not that much lower than today’s rates.
To flash even further into the past, concentrated rate hikes in 1994 set up the U.S. economy for a stellar performance in the second half of the 1990’s with strong growth and a healthy labor market. As a millennial who set her expectation for how life would play out for all of us based upon my parents’ experiences in the second half of the 90s, I can say that time period was *quite* prosperous and set a quite unrealistic forecast of what was to come for my generation’s adulthood.
Just to hone in specifically on inventory, in 2012 – 10 years ago – the US had roughly triple the number of homes for sale; today we have about 334 million people in the US versus 314 million people a decade ago, an increase of 6.34%. The US is estimated to have 353 million people in 10 years time; if roughly 4 people share a home, we need to build at least 1.9 million homes per year to accommodate this rise in population. We’ve averaged under that number in the past decade, about 1.29 million per year, just another signal that housing is not falling out of demand any time soon.
Chiefly, we’re not seeing the kind of mortgage defaults and distressed sales that would be necessary for big declines in housing values. Crashes are typically heralded by foreclosures and distressed sales, which just isn’t happening.
To wrap this up, will the uptick in rates influence the market? Yes, but just in leveling the playing field between buyers and sellers and bringing an end to the runaway bidding wars and the ubiquitous ask to waive your financing contingency and offer 15% over ask to be considered by the seller. Closing prices will be closer to ask and the process should be less harrowing for purchasers.
So do your best to take the headlines with a grain of salt and ask a seasoned real estate professional for their advice and insight because we all knows that the news uses fear-messaging to get attention and most of the writers of these blips for the *very academic* publications like the New York Post have zero knowledge of the real estate market and are just re-spinning and further contorting hearsay from another online journal.