3 Graphs To Show You Why Today’s Housing Market Won't Crash

Given how often the media talks about the housing market, you might be wondering if this is another housing bubble. It's only natural for those thoughts to creep in that make you think it could be a repeat of what took place in 2008. The good news is, there are concrete data to show why this is nothing like the last time.

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

Historical context suggests that there were too many homes for sale during the housing crisis (many of which were short sales and foreclosures), which caused prices to fall dramatically. Although supply has slightly increased since the beginning of this year, there is still an inventory shortage. The main reason for the lack of available homes is due to years of underbuilding.

The data from the National Association of Realtors (NAR) depicted in the graph below shows how today's unsold inventory (3.2 months) compares to previous lows during the housing crash. Years ago, at the current sales pace, there was a surplus of houses available; now, that number has decreased significantly. The housing market is different this time around. There's more demand for houses than there is supply, so home prices are unlikely to drop the way they did during the last recession.

Mortgage Standards Were Much More Relaxed Back Then

Prior to the housing market crash, it was easier to obtain a home loan thanks to more lenient lending standards set by banks. This made it easy for anyone looking to buy or refinance their home in 2006.

In the past, lending institutions were more lenient with both their customers and the products they offered. However, this led to many people defaulting on their loans and foreclosures happening en masse, which then resulted in falling prices. Presently though, things have changed for the better; purchasers are now held to higher standards by mortgage companies.

The graph below uses data from the Mortgage Bankers Association's (MBA) Mortgage Credit Availability Index (MCAI) to help illustrate how easy or difficult it is to obtain a mortgage. A higher number on the index indicates that it is easier to get a mortgage. The lower the number, the more difficult it is. In the latest report, the index declined by 5.4%, which means standards are getting stricter.

As the graph reveals, credit availability today is much different than it was during the lead-up to the housing market crash. The past 14 years have seen tighter lending standards, helping to avoid a mass foreclosure situation such as we saw last time.

The Foreclosure Volume Is Nothing Like It Was During the Crash

Yet another difference is the number of homeowners who were forced to confront foreclosure after the housing market bubbles burst. Since the crash, however, fewer homes have been subject to foreclosure activity — primarily because today's buyers are more qualified and thus less likely to default on their loans. The graph below uses data from ATTOM Data Solutions to help paint the picture of how different things are this time:

In addition, modern homeowners have access to opportunities that were unheard of during the housing crisis, when many people's mortgage debt outweighed the value of their homes. Today, increased equity has given rise to a new class of "equity rich" homeowners. This equity is largely generated by appreciation in home prices over time. According to CoreLogic:

“The total average equity per borrower has now reached almost $300,000, the highest in the data series.”

Rick Sharga, Executive VP of Market Intelligence at ATTOM Data, explains the impact this has:

“Very few of the properties entering the foreclosure process have reverted to the lender at the end of the foreclosure. . . . We believe that this may be an indication that borrowers are leveraging their equity and selling their homes rather than risking the loss of their equity in a foreclosure auction.”

This indicates that homeowners are in a much different position this time around. For those who are facing challenges today, many have the option to sell their house and avoid foreclosure by using their equity.

Bottom Line

The graphs should show why you shouldn't be worried about a repeat of the housing crash. With concrete data and expert insights, it's easy to see how this is different from last time.