By Mike Miles
Home values have been rising and banks are creating loan products to gain more market share. Here we go again right? Not exactly. While it’s true that both of these things are happening, today’s real estate and lending markets are substantially different than the years immediately preceding the housing collapse. Let’s look at some metrics to help explain why.
Home prices in many markets have reached the 2006 levels. However, prices should be much higher based off inflation over the past 12 years. Adjusting for inflation over that span results in home values being nearly 20 percent below where they were in 2006.
There is a concern that banks are easing lending guidelines to similar levels that helped create the housing bubble. It’s not true. Remember, banks don’t necessarily create lending guidelines unless it’s for a product it intends to keep in-house. Lending guidelines for most loans are set by Fannie Mae and Freddie Mac (conforming) or government-sponsored enterprise channels (FHA and VA).
The Housing Credit Availability Index (HCAI) is a metric used to measure the percentage of home loans that are likely to default (go past 90 days past due). A lower reading means that guidelines are being imposed as a way of not tolerating defaults. Today’s HCAI is at the lowest it’s been since 2013 and even if the current percentage doubled, it would still be lower than it was in the years before the collapse.
In 2006, many homeowners abused their equity by borrowing and spending it without much concern for the ramifications. This contributed to an overload of mortgage debt that couldn’t, or wasn’t, paid back when prices crashed. The current debt service ratio (which calculates mortgage debt as a percentage of personal income) is nearly half of what it was in 2006. Additionally, today’s ratio is the lowest reading in 38 years.
There is no doubt that the housing market is competitive. The current supply and demand is contributing to price increases, and in some cases, bidding battles. In certain situations, it can seem like the market is racing back to the days of the crash, but rest assured, it’s not.
Today’s housing market is strong and healthy with a competitive advantage for those with property to sell. There is still high demand and low inventory. So if you’re thinking of upsizing, downsizing, or just want a change of scenery, now is a great time to move.