This article continues our last post’s commentary on why the current housing market is not a recurrence of the housing crash of 2008. Graphic visuals help explain each of three new points, offering further assurance that today’s housing market reflects history not repeating itself.
New construction isn’t making up the difference in inventory needed.
An overabundance of newly built homes was a major challenge during the housing crash. This is not a problem today; in fact, new construction is not even making up the difference in the inventory that is needed at this hour, as shown here.
Houses are actually more affordable now than they were then.
The affordability formula has three components:
- The price of the home;
- The wages earned by the purchaser;
- The mortgage rate currently available.
In 2006, prices were high, wages were low, and mortgage interest rates were over 6%.
While prices are still high today, wages have increased and historically-low mortgage rates are about 3%. This all equals a homeowner paying less of their monthly income toward their mortgage payment than they did back then, as shown in the chart below.
Chief economists contend that home-buying power is very strong at this time; buyers can afford to borrow and buy more.
People are equity rich, not tapped out.
In the run-up to the housing bubble, homeowners were using their homes as personal ATM machines. Many immediately withdrew their equity once it built up, and they learned their lesson in the process.
Prices have risen nicely over the last few years, leading to over 50% of homes in the country having greater than 50% equity – and owners have not been tapping into it like the last time.
During the crash, home values began to fall, and sellers found themselves in a negative equity situation; the amount of the mortgage they owed was greater than the value of their home. Foreclosures and short sales were the negative result of owners walking away from their homes; the sale price and value of homes in certain areas suffered.
Average home equity now stands at over $190,000 which makes a repeat scenario very unlikely to happen.
The table below shares the equity withdrawal over the last three years compared to 2005, 2006, and 2007. Homeowners have cashed out almost $500 billion dollars less than before.