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A recent survey revealed that many consumers believe there’s a housing bubble beginning to form. That feeling is understandable, as year-over-year home price appreciation is still in the double digits. However, this market is very different than it was during the housing crash 15 years ago. Here are four key reasons why today is nothing like the last time.

1. Houses Are Not Unaffordable Like They Were During the Housing Boom

The affordability formula has three components: the price of the home, wages earned by the purchaser, and the mortgage rate available at the time. Conventional lending standards say a purchaser should not spend more than 28% of their gross income on their mortgage payment.

Fifteen years ago, prices were high, wages were low, and mortgage rates were over 6%. Today, prices are still high. Wages, however, have increased, and the mortgage rate, even after the recent spike, is still well below 6%. That means the average purchaser today pays less of their monthly income toward their mortgage payment than they did back then.

In the latest Affordability Report by ATTOM Data, Chief Product Officer Todd Teta addresses that exact point:

“The average wage earner can still afford the typical home across the U.S., but the financial comfort zone continues shrinking as home prices keep soaring and mortgage rates tick upward.”

Affordability isn’t as strong as it was last year, but it’s much better than it was during the boom. Here’s a chart showing that difference:

If costs were so prohibitive, how did so many homes sell during the housing boom?

2. Mortgage Standards Were Much More Relaxed During the Boom

During the housing bubble, it was much easier to get a mortgage than it is today. As an example, let’s review the number of mortgages granted to purchasers with credit scores under 620. According to credit.org, a credit score between 550-619 is considered poor. In defining those with a score below 620, they explain:

“Credit agencies consider consumers with credit delinquencies, account rejections, and little credit history as subprime borrowers due to their high credit risk.”

Buyers can still qualify for a mortgage with a credit score that low, but they’re considered riskier borrowers. Here’s a graph showing the mortgage volume issued to purchasers with a credit score less than 620 during the housing boom, and the subsequent volume in the 14 years since.

Mortgage standards are nothing like they were the last time. Purchasers that acquired a mortgage over the last decade are much more qualified. Let’s take a look at what that means going forward.

3. The Foreclosure Situation Is Nothing Like It Was During the Crash

The most obvious difference is the number of homeowners that were facing foreclosure after the housing bubble burst. The Federal Reserve issues a report showing the number of consumers with a new foreclosure notice. Here are the numbers during the crash compared to today:

There’s no doubt the 2020 and 2021 numbers are impacted by the forbearance program, which was created to help homeowners facing uncertainty during the pandemic. However, there are fewer than 800,000 homeowners left in the program today, and most of those will be able to work out a repayment plan with their banks.

Rick Sharga, Executive Vice President of RealtyTrac, explains:

“The fact that foreclosure starts declined despite hundreds of thousands of borrowers exiting the CARES Act mortgage forbearance program over the last few months is very encouraging. It suggests that the ‘forbearance equals foreclosure’ narrative was incorrect.”

Why are there so few foreclosures now? Today, homeowners are equity rich, not tapped out.

In the run-up to the housing bubble, some homeowners were using their homes as personal ATM machines. Many immediately withdrew their equity once it built up. When home values began to fall, some homeowners found themselves in a negative equity situation where the amount they owed on their mortgage was greater than the value of their home. Some of those households decided to walk away from their homes, and that led to a rash of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of other homes in the area.

Homeowners, however, have learned their lessons. Prices have risen nicely over the last few years, leading to over 40% of homes in the country having more than 50% equity. But owners have not been tapping into it like the last time, as evidenced by the fact that national tappable equity has increased to a record $9.9 trillion. With the average home equity now standing at $300,000, what happened last time won’t happen today.

As the latest Homeowner Equity Insights report from CoreLogic explains:

“Not only have equity gains helped homeowners more seamlessly transition out of forbearance and avoid a distressed sale, but they’ve also enabled many to continue building their wealth.”

There will be nowhere near the same number of foreclosures as we saw during the crash. So, what does that mean for the housing market?

4. We Don’t Have a Surplus of Homes on the Market – We Have a Shortage

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. As the next graph shows, there were too many homes for sale from 2007 to 2010 (many of which were short sales and foreclosures), and that caused prices to tumble. Today, there’s a shortage of inventory, which is causing the acceleration in home values to continue.

Inventory is nothing like the last time. Prices are rising because there’s a healthy demand for homeownership at the same time there’s a shortage of homes for sale.

If you’re worried that we’re making the same mistakes that led to the housing crash, the graphs above show data and insights to help alleviate your concerns.

With homeownership you can lock in the cost today, and have an asset that increases in value over time, making it a great hedge against inflation.

When looking at home price appreciation versus consumer price increases gong back to the 1970s, we can see how home price appreciation outpaces inflation. Of course, the 2000s was a fundamentally different housing market with an oversupply of homes and lower lending standards. Overall, we can see that buying a home today would not only lock in today’s costs and provide a hedge against inflation, but avoid the rising rental rates.

Rental prices are skyrocketing, and the forecasts project that not only will home values will continue rising, but so will mortgage rates.

Rent increases have been greater than inflation in most years. That means it’s more expensive to rent over time.

For a $200,000 home at 3.5% interest rate today your monthly payment would be $898. However, in Q1 of 2023 when that same home will be $212,600, interest rates will be $3.8%, and now your monthly payment is $990. That’s a difference of $33,314 over the life of the 30-year mortgage. That amount jumps to $66,625 for a $400,000 home.

For a $200,000 home at 3.5% interest rate today your monthly payment would be $898. However, in Q1 of 2023 when that same home will be $212,600, interest rates will be $3.8%, and now your monthly payment is $990. That’s a difference of $33,314 over the life of the 30-year mortgage. That amount jumps to $66,625 for a $400,000 home.

For a $200,000 home at 3.5% interest rate today your monthly payment would be $898. However, in Q1 of 2023 when that same home will be $212,600, interest rates will be $3.8%, and now your monthly payment is $990. That’s a difference of $33,314 over the life of the 30-year mortgage. That amount jumps to $66,625 for a $400,000 home. That’s staggering.

Tangible assets like real estate get more valuable over time making buying a home a good way to spend your money during inflationary times.

This is the Home Price Expectation Survey of 100 economists and data analysts from Q4 of 2021, and represents their house appreciation forecasts by 2026. The group was divided into optimists and pessimists, where optimists projecting the most appreciation over the next 5 years, and the pessimists estimate on the lower end. The pessimists are saying that by 2026 houses will appreciate in value by over 23%. That is pretty significant.  

We’ve recently seen a rise in mortgage rates. Some of the last reported numbers have us around 3.55%, which is certainly higher than in some past years, but the housing market is expected to remain pretty competitive this year. It’s about to start feeling like interest rates are going to be high, but they are historically low for the U.S.

Let’s look at two of the mortgage markets – the purchase market and the refinance market. The purchase market is forecasted to grow, and the refinance market is forecasted to constrict – a typical reaction in a rising rate environment.

Let’s tie in the 10-year treasury for a moment. In the last 2 months, the rate on the 10-year treasury yield has skyrocketed. Why is that important?

For the last 50 years, the relationship between the mortgage rate and the 10-year treasury yield has been almost symbiotic. Wherever the 10-year treasury yield goes, there goes the 30-year fixed rate. The Fed does not control interest rates – it can only hope to influence them. Overall, the 10-year treasury yield may be something worth watching.

Month after month we have talked about why we will not see a wave of foreclosures coming to the market, so let’s wrap up this month looking at the latest data.

Loans in forbearance have fallen below one million. This is huge. We are at roughly 780,000 loans in forbearance which equates to 1.4% of mortgages. It is wonderful to see that the forbearance program has really helped homeowners change their situations during such a time of economic uncertainty.

Looking at loans upon exiting the forbearance program, about 38% percent of homeowners are paid in full by either making monthly payments or paying off their loan. Then, about 44% percent are on some sort of repayment plan – homeowners who have been able to make a loan modification or deferral. Unfortunately, 18.2% of homeowners are exiting the forbearance plan without a loss mitigation plan. The bright side of that is, according to Black Knight, 93% of homeowners in a forbearance plan have at least 10% equity, allowing them the opportunity to sell their home. To put this all in perspective, during the housing bubble burst in 2008, we saw 9.3 million homes go into foreclosure. We are in a very different situation today.

We have significantly fewer foreclosures today than we would even in a normal year. Obviously, the forbearance program came allowed us to see record low foreclosures in the most recent years.

Foreclosure activity is at an all-time low. We are at 151,000 foreclosures, whereas in 2007 to 2015, millions of homeowners were going into the foreclosure process. Even if this number of 151,000 doubled, tripled, or even quadrupled, we would be nowhere near where we were when the housing bubble burst.

Mortgage rates have increased significantly since the beginning of the year. Each Thursday, Freddie Mac releases its Primary Mortgage Market Survey. According to the latest survey, the average 30-year fixed-rate mortgage has risen from 3.22% at the start of the year to 3.55% as of last week. This is important to note because any increase in mortgage rates changes what a purchaser can afford. To give you an idea of how rising mortgage rates impact your purchasing power, see the table below:

How Can You Know Where Mortgage Rates Are Headed?

While it’s always difficult to know exactly where mortgage rates will go, a great indicator of where they may head is by looking at the 50-year history of the 10-year treasury yield, and then following its path. Understanding the mechanics of the treasury yield isn’t as important as knowing that there’s a correlation between how it moves and how mortgage rates follow. Here’s a graph showing that relationship over the last 50 years:

This correlation has continued into the new year. The treasury yield has started to climb, and that’s driven rates up. As of last Thursday, the treasury yield was 1.81%. That’s 1.74% below the mortgage rate reported the same day (3.55%) and is very close to the average spread we see between the two numbers (average spread is 1.7).

Where Will the Treasury Yield Head in the Future?

With this information in mind, a 10-year treasury-yield forecast would be a good indicator of where mortgage rates may be headed. The Wall Street Journal just surveyed a panel of over 75 academic, business, and financial economists asking them to forecast the treasury yield over the next few years. The consensus was that experts project the treasury yield will climb to 2.84% by the end of 2024. Based on the 50-year history of following this yield, that would likely put mortgage rates at about 4.5% in three years.

While the correlation between the 30-year fixed mortgage rate and the 10-year treasury yield is clear in the data shown above for the past 50 years, it shouldn’t be used as an exact indicator. They’re both hard to forecast, especially in this unprecedented economic time driven by a global pandemic. Yet understanding the relationship can help you get an idea of where rates may be going. It appears, based on the information we have now, that mortgage rates will continue to rise over the next few years. If that’s the case, your best bet may be to purchase a home sooner rather than later, if you’re able.

Forecasting mortgage rates is very difficult. As Mark Fleming, Chief Economist at First American, once said:

“You know, the fallacy of economic forecasting is don’t ever try and forecast interest rates and or, more specifically, if you’re a real estate economist mortgage rates, because you will always invariably be wrong.”

However, if you’re either a first-time homebuyer or a current homeowner thinking of moving into a home that better fits your changing needs, understanding what’s happening with the 10-year treasury yield and mortgage rates can help you make an informed decision on the timing of your purchase.

An increased supply and slowing of demand, likely due to rising interest rates, may causse the real estate market to be less competitive and see prices normalize.

2021 was an incredible year for real estate in the U.S. due to low mortgage rates, lots of demand, low inventory, and a rebounding job market. Supply and demand is still unbalanced headed into this spring, allowing sellers the upper hand. In an interview with the Associated Press, Lawrence Yun, Chief Economist at the National Association of Realtors® answers some burning questions about this year in real estate.

Question: How do you see the housing market’s trajectory shaping up this year?

Answer: The mortgage rates will definitely be higher, which means that people who were barely able to qualify last year will not be able to do so this year. Combine that with some increase in supply. Builders have the profit motive. Lumber prices and other materials costs are rising, but they’re simply tacking on those additional costs to consumers, who are willing to buy. So, increased supply, some chopping off of demand from rising interest rates, should lead to less intense competitive market conditions. Price growth will be something around 5% in 2022, which will be a very normal rate of increase.

Question: Fair to say homeowners who are selling will still have an edge on buyers nationally?

Answer: We’re in a housing shortage of roughly 3 or 4 million. And given that homebuilders can probably at the maximum put up maybe 2 million homes, more likely 1.7 or 1.8 million homes (a year), this housing shortage will persist this year and probably linger on somewhat next year. Hence, the market in 2022 will still favor sellers.

Question: How high do you see mortgage rates going this year?

Answer: My best guess at the moment is about 3.7%. It could be a little lower or a little higher, but it’s going to certainly be higher than the 3% people enjoyed last year.

Question: To what degree will higher rates dampen home sales?

Answer: Rising home prices have hindered affordability, but now rising interest rates are another thing that will begin to shave off some of the demand potential from first-time buyers. My official forecast for home sales this year is they will come down about 2% from last year.

Question: Has the pandemic led to any enduring changes to the way Americans buy and sell homes?

Answer: The pandemic will come to an end. Hopefully, the sooner the better. But the work-from-home situation, that development is here to stay. That will be the key factor driving the housing market preference and demand.

Question: What’s the biggest worry you have about the housing market now?

Answer: The housing market is on a solid foundation, in the sense that we don’t have those loose lending conditions. Housing equity, minus the mortgage balance, is substantial.

We need to ensure that the housing supply continues to increase, and look at converting office and other spaces to affordable housing.

 
To put some context on what is happening in the market with prices right now, let’s look at the latest year-over-year home price appreciation.

 
This dramatic home price appreciation is a factor of the recent supply and demand imbalance we have talked about over the past months. We simply have not had enough homes on the market for the demand from buyers, which caused prices to rise.
 

 
When the experts start speaking of “decelerating trends,” they are not projecting depreciation, just a slower, more moderate home price appreciation. This is where understanding the difference between depreciation and a decelerating trend is paramount to understand what is going on in the market. To help clarify, let’s look at the estimated home price performance from the Home Price Expectations Survey.
 

 
Through the remainder of 2021, home prices are expected to increase or appreciate (11.74%). So, a slowing of the appreciation we are seeing at 17% and 18%. Then looking ahead, prices are expected to appreciate on a more moderate level – an average of 5.7% through 2025. Home prices are continuing to accelerate, just at a slower pace. The combination of continued home price appreciation, and increasing mortgage interest rates, means buying now could be critical to a long-term wealth advantage.
 

 
Forecasters are struggling with the forecasts for the remainder of this year. To understand why this is, let’s take a look at the annualized home sales for 2019, 2020, and 2021.
 

 
Business slowed during the lockdown in 2020 when people were taking their homes off the market due to uncertainty. We then saw a tremendous end to 2020, as people began to feel more comfortable, and we seemed to be making up for the missed business earlier in the year. Then in 2021, it looks like we are headed for less business year-over-year, compared to 2020. The reality is that the second part of 2020 was unusual, and making up for a crazy time in the market. Let’s also not forget we are trending well above 2019 – which was a very good year in real estate.
 

 
2019 was the best year in real estate (with the exception of 2017) in the past decade. Remember how to put it into perspective when the news tries to taunt us with the scary headline that, “We’re down year over year.” We are below prior year because it was unusual with the lockdown and we packed a year’s worth of business in the latter part of the year, but, despite this, we are well above 2019 – one of the best years in real estate over the past decade.
 

 
Typically, we see listings (homes coming to market) peak in fall. This was the case for 2017, 2018, and 2019.
 

 
However, in 2020 monthly listing counts peaked in April.
 

 
In 2020, as listings decreased, sales increased.
 

 
And the big question becomes: When will listings peak this year? Listings could either grow, and we eclipse where we were in 2020, which would be a huge relief on pricing. Or, listings flatten out, and we intersect where we were in 2020 at some point. Finally, listings could begin to dwindle, and cause more price appreciation.
 
However, it seems as if we will see continued listings going into this fall. First, because of pent up seller demand, and homeowners being more comfortable putting their homes on the market. Second, new construction. Building is starting to take off as material prices start to equalize. Third, and finally, the end of forbearance will create new listings. Not a wave of foreclosures, but it will create a time in the market for people that say, “We can’t afford the home any longer, and we’re going to have to sell it.” In addition, the recent price appreciation may cause people to want to take advantage of that equity and move.
 

 
Interest rates are becoming a hot topic in the market right now. It’s going to become more expensive for people to borrow. Right now the 30-year fixed just jumped above 3%.
 


 
We see the Fed starting to taper on buying in the mortgage market, causing interest rates to go up.
 

 
Around the middle to the third quarter of next year, interest rates are projected to be about 3.5%. Interest rates are on the rise. So what is the cost of waiting?
 

 
Let’s look at an example of a $300,000 home today at a 2.7% interest rate. With the home price appreciation projections, and interest rate projections, that could mean a monthly payment increase of $72.45 or a difference over the life of the 30-year loan of $25,938 if the purchase doesn’t happen today, but happens in the fourth quarter of this year. It’s going to cost more to purchase and finance a home in the months (and years) to come.
 

 
The Home Price Expectations Survey shows that if you look at a $350,000 home over the next five years, the purchaser of that home stands to gain just over $111,000 in gained equity based on forecasted appreciations for the next five years. Homeownership cannot only accumulate wealth, but be an effective hedge against inflation, because you have a fixed payment.

 
Here’s how we wrapped up the month in Tallahassee:

If you’re thinking of buying or selling a house, chances are you’re focusing on the many extraordinary ways it’ll change your life. What you may not realize is that decision impacts people’s lives far beyond your own. Home purchases and sales are significant drivers of economic activity. They have a major impact on your community and the entire U.S. economy via the multiple industries and professionals that take part in the process.
The National Association of Realtors (NAR) releases a report each year that highlights just how much economic activity a home sale generates. The chart below shows how the sale of both a newly built home and an existing home impact the economy:To dive a level deeper, NAR also provides a detailed look at how that varies state-by-state for newly-built homes (see map below):As you can see, a single home sale can have a massive effect on the overall economy. Ali Wolf, Chief Economist for Zonda, talks about this in a recent article, noting there’s a significant impact at each distinct phase of the transaction:

“The housing market contributes to the economy in four main stages: during planning and land development, throughout the actual construction of the home, at the point of sale, and upon moving in.”

When you buy or sell a home, you’re leaving a lasting impression on the community at large in addition to fulfilling your own needs. That’s because each stage of the process involves numerous contractors, specialists, lawyers, town and city officials, and so many other professionals. Every individual you work with, from your trusted real estate advisor to the architects who design new homes, has their own team of professionals involved behind the scenes.
Homebuyers and sellers are economic drivers in their community and beyond. Selling won’t just change your life; it’ll make a powerful impact on our entire community.