Today’s Market Is Not Like The Great Recession Housing Bubble And Here Is Why

With inflation at 9.1% for June 2022 and the Federal Reserve aggressively raising interest rates, the housing market has calmed down. Prices are not rising as fast, and in some cities, prices are beginning to fall. The market has been red hot for the past eight years, with housing prices increasing dramatically since the Great Recession.

Some have called the housing boom a housing bubble, while others say it is the normal economics of supply and demand. Today’s housing market is considerably different than during the Great Recession and the housing market collapse in 2008.

The Great Recession and the Housing Market

The Great Recession housing market was similar in some ways to today. House prices were high and not affordable for many potential home buyers. A big difference back then was mortgage lending laws were lax about writing mortgages. It seemed as if anyone could get a mortgage.

There were loans, nicknamed NINJA mortgages, short for no income, no job, and no assets that lenders were writing. Too many of the approved loans were for people with low credit scores, known as sub-prime loans, which are risky. Many of these loans were zero down payment loans.

Mortgage rates weren’t high by historical standards, yet many of the mortgages were adjustable rate mortgages (ARMs). These mortgages remain at a constant rate for some time and then reset when a balloon payment is due. When the balloon payments came due, many couldn’t afford them.

Mortgage lenders were packaging these sub-prime mortgages into mortgage-backed securities. The credit rating agencies rated these securities as investment grade when in reality, they were junk.

Foreclosures started increasing, and banks found themselves holding too many junk securities. The housing market started to collapse. Many homeowners found themselves unable to pay the mortgage, and some with little money in their homes just walked away.

Today’s Housing Market

One major difference today is the housing market is much healthier, and mortgage lending rules are stricter. There are not as many risky loans, with ARMs accounting for only 8% of the current active mortgages. In 2007, ARMs accounted for 36% of all mortgages.

Mortgage lending rules are much stricter today than before the Great Recession. The average FICO score of a borrower in 2007 was 699. Today the average credit score of borrowers is 751.

The main problem today is supply and demand. There are too few available homes than there are buyers. Home affordability is now at an all-time low. Unlike in 2008, there is still a high demand for home ownership today.

It is unlikely that higher mortgage rates today will cause foreclosures to increase since most current homeowners locked in low rates during the past several years. And Homeowners today have a record amount of equity.

The good news is that competition for homes has calmed down. If you’ve had a hard time finding homes for sale in Lakeland, the best advice is to keep looking and contact a real estate agent in Lakeland. Make sure you have a pre-approved mortgage and be patient.