3 Graphs To Show This Isn’t a Housing Bubble

With all the news and excitement in the media, some shoppers think the housing market is in a bubble. You could be wondering what will happen next as the housing market shifts. It's only natural to have worries about whether it'll be a repeat of 2008 when it comes down to it. The good news is that there's actual data proving that this isn't anything like before.

There’s a Shortage of Homes on the Market Today, Not a Surplus

In a healthy real estate market, the supply of goods required to keep things humming along is roughly six months. Anything more than that is an overabundance, which will result in prices depreciating. Anything less than that is a scarcity and will cause prices to rise.

For historic context, there were too many houses for sale during the housing crisis (many of which were short sales and foreclosures), and this caused prices to drop. There is a supply problem now, but it isn't as severe as it was previously.

The graph below compares the present state of affairs with the Great Recession, using data from the National Association of Realtors (NAR). Today's unsold inventory is now only a 3.0-months’ supply at current sales levels.

Inventory shortages are one of the reasons why prices have remained subdued. When you add on continuing buyer demand as millennials approach their peak homebuying years, it continues to put upward pressure on house values. That restricted supply versus buyer demand is what causes experts to believe that house values won't drop this time around.

There’s a Shortage of Homes on the Market Today, Not a Surplus

The supply of inventory needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued price appreciation.

For historical context, there were too many homes for sale during the housing crisis (many of which were short sales and foreclosures), and that caused prices to tumble. Today, supply is growing, but there’s still a shortage of inventory available.

The graph below uses data from the National Association of Realtors (NAR) to show how this time compares to the crash. Today, unsold inventory sits at just a 3.0-months’ supply at the current sales pace.

Sustained underbuilding is one of the reasons inventory has stayed low. When you add in continuing buyer demand as millennials enter their peak homebuying years, it puts further upward pressure on home prices. Experts predict that there will be a shortage of homes on the market, thus home values will not plummet this time.

Mortgage Standards Were Much More Relaxed During the Crash

It was considerably easier to get a home loan prior to the housing bubble than it is today. The Mortgage Bankers Association's Mortgage Credit Availability Index (MCAI) graph below shows data on how easy it is to obtain a mortgage in the United States (MBA). The higher the index, the simpler it is to get a mortgage.

Banks have been fueling volatility by lowering lending standards and making it easy for anybody to qualify for a home loan or refinance their current property since 2006. In those days, financial institutions assumed considerably more hazard in both the borrower and the mortgage instruments offered. This resulted in widespread defaults, foreclosures, and declining prices.

Today, things are different, and borrowers must meet much tighter standards from mortgage lenders. Mark Fleming, Chief Economist at First American, says:

“Credit standards tightened in recent months due to increasing economic uncertainty and monetary policy tightening.” 

Stricter standards, such as those currently in place, would have aided to avoid a rash of foreclosures like the one that occurred previously.

The Foreclosure Volume Is Nothing Like It Was During the Crash

The most apparent variation is the number of homeowners who were in danger of losing their homes due to the housing bubble bursting. Since the recession, foreclosure activity has been steadily decreasing because purchasers are more educated and less likely to default on their loans. The graphic below was generated with data from ATTOM Data Solutions to help tell the story:

Today's homeowners are not only equity rich, but also equity wealthy relative to their previous net worth. Some homeowners used their houses as personal ATMs in the years leading up to the housing bubble. Once they had acquired a large amount of money, many people quickly extracted it from their homes. When home values began to decline, some homeowners found themselves in a negative equity situation, in which their mortgage debt was greater than the value of their property. Some of those people decided to leave their homes and caused a wave of distressed property listings (foreclosures and short sales) that sold at huge discounts, reducing the value of other houses in the area. Today's prices have risen significantly in recent years, giving homeowners an equity boost. According to Black Knight:

“In total, mortgage holders gained $2.8 trillion in tappable equity over the past 12 months – a 34% increase that equates to more than $207,000 in equity available per borrower. . . .”

This time, homeowners are in a completely different situation than they were five years ago. The typical home equity is $207,000 today.

Bottom Line

If you're concerned we're making the same mistakes as in the housing market collapse, see for yourself with the graphs above. Concrete facts and professional insights debunk this notion.