Looking through the Crystal Ball, at the Housing Market

As the great philosopher, Yogi Berra stated: “It’s tough to make predictions, especially about the future.” – though one can’t help but try.

In fact, another old adage is that, in order to understand the future, you need to study the past. Some Americans may feel we are reliving the movie “Groundhog Day” in the housing market. Fear that the collapse we witnessed in 2008 might replay itself has occurred to many of us. If we look closely at current trends and compare, however, we might have some reason to hope that this is not the case.

The Challenges

Interest rates are rising. According to Barron’s:

The latest reading on nationwide pricing comes from back in March. Since then, 30-year mortgage rates have shot up to nearly 6%, and applications from buyers have slowed. 

Housing prices in March were up 20% from the previous year, but experts expect prices to decline slightly by the end of this year. The predictions for next year depend on whether the US goes into recession. Still, prices for next year are expected to be flat, or down approximately 5%. 

May numbers just came out and existing home sales fell 3.4% in May, and the average home price has topped $400,000 for the first time.

The Good News

Once you take away rising interest rates and decreasing prices, differences between the market in 2008 and today are quite significant. 

The housing market and the mortgage market are significantly healthier today than in 2008. Regulations put in place after the meltdown are largely responsible. Leading up to 2008 the banks repackaged bad loans into larger financial products that were able to claim triple-A ratings. Investors bought them up, with the expectation that like other triple-A bonds, they would get a good reliable return with almost no chance of default. Lack of transparency lead to lots of speculation, and later to a huge bubble that popped all over the housing market, and economy as a whole.

Today mortgage “health” is dramatically better. There aren’t as many risky loans and delinquencies at a record low. Mortgage borrowers’ average FICO score is over 50 points higher than in 2010.* Home equity is near record highs. 

The percentage of adjustable-rate mortgages (ARMs) were at a record high, 36% in 2007. Today they represent only about 8%, the lowest on record.

“The mortgage market is on very historically strong footing,” said Andy Walden, vice president of enterprise research at Black Knight. “Even the millions of homeowners who availed themselves of forbearance during the pandemic have by and large been performing well since leaving their plans.” *

That Cloudy Crystal Ball…

Larger macroeconomic issues, including the possibility of recession and complications from the war in Ukraine, make peering into the next year and a half very tricky. The unfriendly interest rate environment has already taken a significant toll on the stock market, and that pain will continue until the Fed either engineers a soft landing or the economy falls into recession. 

It should be at least somewhat comforting that experts don’t believe we will be reliving anything close to the crash in 2008. The housing and mortgage industries are in much better shape now, and though there is probably more pain to come for the stock market and the economy, very few industry observers expect it to be dramatic. 

The overall trend of low inventory and high demand for housing is expected to continue for years. Affordability will eventually improve as inventory rises, but pricing will likely stay very strong for the foreseeable future.

*CNBC