With house prices continuing to show double-digit increases, some are worried about whether we are in a real estate bubble like the one in 2006. However, a more detailed analysis of market data indicates that the current scenario has nothing to do with 2006, for three main reasons.
1. The real estate market is not driven by risky mortgage loans.
In 2006, almost everyone could qualify for a home loan. O Mortgage Credit Availability Index (MCAI) of Mortgage Bankers' Association is an indicator of the availability of mortgage money. The higher the index, the easier it is to get a mortgage. O MCAI more than doubled from 2004 (378) to 2006 (869). Today, the index stands at 130. As an example of the difference between today and 2006, let's look at the volume of mortgages originated when a buyer had less than a 620 credit score, i.e. today these people would not qualify for a home loan.
There are marked differences in the current price increase compared to 2005, which was a bubble fueled by risky loans and tolerant underwriting. Today, loans with high-risk characteristics are absent and mortgage underwriting is prudent.
2. The owners are not using their homes as ATMs at the moment.
During the housing bubble, while prices were skyrocketing, people were refinancing their homes and withdrawing large sums of money (cash-out). As prices began to fall, many were driven to a situation of negative equity (where the mortgage was higher than the value of the house).
Today, homeowners are allowing their equity to grow, without using refinancing to "withdraw money", but rather to reduce interest costs.
Net worth is the amount available for homeowners to access before reaching a combined loan-to-value ratio of a maximum of 80% (therefore still leaving them with at least 20% of equity).
In 2006, this figure was US $ 4.6 billion. Today, that figure stands at more than US $ 8 billion.
However, the percentage of refinancing with drawdown (in which the owner takes out at least 5% more than the original value of the mortgage) is half of what it was in 2006.
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3. This time, it's simply a question of supply and demand.
FOMO (the Fear Of Missing Out - the fear of losing) dominated the real estate market, leading to the housing bubble of 2006 and boosted buyer demand. At that time, the supply of housing more than kept up, as many owners put their homes up for sale, as evidenced by the existing stock of homes available for sale in 2006 for more than seven months. Today, that figure is barely two months.
Builders also increased in size during the bubble, but retreated significantly in the following decade.
Sam Khater, VP and Chief Economist, Economic Research and Housing at Freddie MacHe explains that the downturn is the main factor behind the lack of stock available today: "The main housing shortage has been the long-term decline in the construction of single-family homes. "
Here is a graph that quantifies Khater's observations:
Today, there simply aren't enough houses to meet current demand.
SUMMARY
Today's market is nothing like what we saw in 2006. Bill McBride, author of the prestigious blog Calculated Risk He predicted the last real estate bubble and crash. This is what he has to say about today's real estate market:
"It's not clear to me whether things will slow down significantly in the near future. In 2005, I had the strong feeling that the heated market was going to change and that when it did, things would get very ugly. Today, I don't feel that way, because all the fundamentals are there. Demand will be high for a while because millennials need homes. Prices will continue to rise for a while because stock is so low. "
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