Back Then, Mortgage Standards Were Less Strict

Leading up to the 2008 housing crisis, it was much easier to get a home loan than it is today. Banks were creating artificial demand by lowering lending standards and making it easy for just about anyone to qualify for a home loan or refinance an existing one. The requirements for credit scores, income, and debt-to-income ratios were much looser than today.

As a result, lending institutions took on much greater risk in both the person and the mortgage products offered. That led to mass defaults, foreclosures, and falling prices.

Today, things are different, and homebuyers face much higher standards from mortgage companies. The graph below uses data from the Mortgage Bankers Association (MBA) to help illustrate this point. In this index, the higher the number, the easier it is to get a mortgage. The lower the number, the harder it is.

This graph also shows just how different things are today compared to the spike in credit availability leading up to the crash. By enacting tighter lending standards, financial institutions have helped prevent a situation from happening today that could lead to a wave of foreclosures like we saw in 2008.

Foreclosure Volume Has Declined a Lot Since the Crash

Another difference between then and now is the number of homeowners that were facing foreclosure when the housing bubble burst. Foreclosure activity has been considerably lower since the crash, largely because buyers today are more qualified and less likely to default on their loans. The graph below uses data from ATTOM to show the difference between then and now:

So even as foreclosures tick up, the total number is still very low. And on top of that, most experts don’t expect foreclosures to go up drastically like they did following the crash in 2008. Bill McBride, Founder of Calculated Risk, explains the impact a large increase in foreclosures had on home prices back then – and how that’s unlikely this time.

“The bottom line is there will be an increase in foreclosures over the next year (from record level lows), but there will not be a huge wave of distressed sales as happened following the housing bubble. The distressed sales during the housing bust led to cascading price declines, and that will not happen this time.”

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The Supply of Homes for Sale Today Is More Limited

Another reason why today’s housing market is not headed for a crash is that there were too many homes for sale during the 2008 housing crisis – many of which were short sales and foreclosures – and that caused prices to fall dramatically. Supply has increased since the start of this year, but there’s still a shortage of inventory available overall, primarily due to years of underbuilding homes.

The graph below uses data from the National Association of Realtors (NAR) to show how the months’ supply of homes available now compares to the crash. Today, unsold inventory sits at just 2.7 months’ supply at the current sales pace, which is significantly lower than the last time. There just isn’t enough inventory on the market for home prices to come crashing down like they did last time, even though some overheated markets may experience slight declines.

Bottom Line

If recent headlines have you worried we’re headed for another housing crash, the data above should help ease those fears. Expert insights and the most current data clearly show that the market is nothing like it was last time and today’s housing market is not headed for a crash.

And, if you’re in the market to buy a home, Executive Financial Group offers a wide range of mortgage products and is committed to finding the right loan for your needs to get you into your new home. To learn more, let’s connect!