Why You Shouldn’t Worry About the Real Estate Crash
The Big Crash
There were many factors contributing to the fall in the real estate market. The crash didn’t happen immediately; it actually occurred over approximately three to four years. In 2006 subprime mortgages (those made to customers with less-than-perfect credit) made up nearly 20 percent of the market. During the Clinton presidency (1993–2001), his administration was essentially forcing banks to lend to low-credit individuals or face large fines. Individuals were getting no-doc loans, basically not having to prove their creditworthiness through pay statements, tax returns, or bank balances.
Many of these subprime mortgages were then packaged together and underwritten by major banks and insurance companies (like AIG) and resold on secondary markets as investment vehicles. The result was a huge influx of new home buyers who really shouldn’t have been buying because of their credit and/or financial positions, or home buyers who were purchasing much more expensive homes than they should have. As owners began defaulting and getting foreclosed on, the whole scenario began to unravel.
Don’t you worry
Many today still worry about whether the real estate and housing market could see a similar crash to that of 2006–2009. I think this is unlikely, but you absolutely cannot predict the future. As a result of the crash in real estate, several safeguards were put in place to prevent this from happening again.
First, no-doc loans are not done anymore. One of the least enjoyable steps of buying a home today is the small mountain of paperwork your lender will likely require you to send to them. Mortgage credit and underwriting standards are at an all-time high. Second, the appraisal process also has newer, more stringent guidelines on how home values are determined, and the appraisers are required to show documentation/proof on how they derived their valuations, thus greatly reducing the probability of artificially inflating property values.
Things are better now
The foundation underlying the housing market is much stronger today than during the 2006–2009 crash. The majority of the country is seeing a rise in median family incomes and lower interest rates nationwide. The average payment-to-income ratio is just over 20 percent, compared to nearly 35 percent from 2000 to 2007. Broken down, this simply means that housing is more affordable today in most parts of the country, though there are still some areas, like coastal California, New York, and Washington DC that are well above that average and probably always will be.
The US economy is experiencing a much higher participation in the workforce, and hourly earnings are increasing as well. This results in a greater number of well-qualified home buyers to go along with a reduced number of home inventories. These are two additional characteristics that were not present a decade ago.
Although recent news headlines may be reminiscent of the bubble era, the fundamental conditions that led to the crash have diminished. The real estate market today has a stronger foundation than it did in 2006, thanks to a more disciplined and conservative credit underwriting of debt and a market that is much healthier than it has been at any point during the past decade.