Is This Housing Decline Similar to the Great Recession?

October 5th, 2023  / Author: Cesar Gomez

As the mortgage rates surpass pre-pandemic levels, sales are dropping, and some real estate firms announced layoffs. Many people wonder if there is a recession coming, and even speculate if this housing climate is in any way similar to the one in 2007/8, before the Great Recession.

Real estate experts answer with a categorical “no”, and firmly believe in the health of the US economy. There are quite some arguments that support this claim, especially when we compare some of today’s data with those from 2007-2010.

Increased home prices are agonizing for new home buyers. However, those jumps in house value created a record amount of home equity and decreased total mortgage debt against the current home value. Collective leverage is now under 43%, and this is the lowest number on record.

Signs of a Healthy Economy

It is debated whether the market slow-down resembles the market crash of 2008, but there are strong indicators of healthy housing and lending practices nationwide. Stating with the borrower’s financial abilities, we can already tell that it is a much better situation today than it was more than a decade ago.

According to FICO records, an average US borrower has a credit score of 751, which is considered to be an above-average category. Twelve years ago, in 2010, the average FICO score was 699. That is to say that the lenders held up their end of the bargain by following the regulations set after the 2008 market crash.

Additionally, borrowers now have access to a record amount of tappable equity, which refers to the amount of money they can cash out from their property, while still leaving 20% of the home value. Some records show that there is currently around $11 trillion dollars of collective tappable equity in the US, which is a 34% year-over-year increase.

Subsequently, there is much less collective leverage, as the total mortgage debt of all US borrowers adds to 43% less than the current home value. This debt is the lowest on the record, and so is the number of cases with negative equity. To put things in perspective, in 2011 one in every four borrowers owed more on the loan than the home is worth, but nowadays there is just a handful of those cases.

Contrasting Data Show Good News for Today’s Housing Market

Adjustable-rate mortgages were very popular before the recession, but those loans often included shady underwriting that obliged borrowers to pay balloon payments or very high rates after the agreed period. This later brought a high number of delinquencies and foreclosures.

There were 13.1 million ARMs in 2007, which was 36% of all mortgages nationwide - more than a third of all mortgages were adjustable-rate loans with a high chance of sketchy underwriting. 10 million of those borrowers were obligated to pay more on a monthly basis after a fixed-rate period.

Today is undeniably better, as ARMs take only an 8% share of all active mortgages, which is around 2.5 million loans. Moreover, 80% of those 2.5 million mortgages have a fixed-rate period of 7-10 years, and 1.4 million borrowers can expect a higher monthly payment. This is unfortunate for those people, but it is still a much lower number than the abovementioned 10 million.

Ultimately, the numbers are showing that the housing market should not expect the recession from the past, but it is not to say that there are no issues. Yes, the lending market is much better regulated, but there are still many people suffering - either pushed out of the market or delinquent on their loans.

There is a population of around 300 thousand people who are exiting the forbearance programs, still not being able to make ends meet. It is important to talk about how healthier the market is right now, but it is also important not to forget about struggling homeowners



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