Home ownership is an important element in achieving the American dream. A recent report from National Association of Realtors (NAR) found that more 86% of buyers agree that home ownership is still the American dream.
Before the 1950s, less than half the country owned homes. However, after World War II, many returning veterans used the benefits offered by GI Bill to buy a house.
Since then, the percentage of owners nationwide has increased to the current rate of 65,5%. This strong desire for home ownership has kept home values appreciating ever since.
The chart below follows the appreciation of house prices since the end of World War II:
Appreciation in the value of houses since World War II
The chart shows that the only time home values dropped significantly was during the real estate boom and bust of 2006-2008.
If you look at how prices skyrocketed before 2006, it looks a bit like the current price increase over the last two years.
This may lead some people to worry that we are about to see a similar drop in home valuesas happened when the bubble burst.
To help alleviate these worries, let's look at what happened last time and what is happening today.
What caused the real estate collapse 15 years ago?
In 2006, foreclosures flooded the market. This drastically reduced home values. The two main reasons for the flood of foreclosures were:
- Many buyers were not really qualified for the mortgage they got, which led to more homes becoming foreclosures.
- A number of homeowners had used the great appreciation of their homes to refinance them and raise capital based on the increased value of their homes. When prices dropped, they found themselves in an underwater situation (where the house was worth less than the home mortgage). Many of these homeowners abandoned their homes, leading to more foreclosures. This further reduced the values of the neighboring houses.
This cycle continued for years.
Why today's real estate market is different
Here are two reasons why today's market is nothing like what we experienced 15 years ago.
1. Today, the demand for home ownership is real (not artificially generated)
By 2006, banks were creating artificial demand by lowering lending standards and making it easier for anyone to qualify for a home loan or refinance their current home.
Today, buyers and those who refinance a home face much higher standards from mortgage companies.
Data from Urban Institute show the amount of risk banks were willing to take on now.
There is always risk when a bank lends money. However, leading to the housing collapse 15 years ago, the lenders assumed much greater risk for both the individual and the mortgage product offered. This led to mass defaults, foreclosures and falling prices.
Today, the demand for home ownership is real. It is generated by a reassessment of the importance of the home due to a worldwide pandemic. Also, lending standards are much more stringent in today's lending environment.
Buyers can pay the mortgage they are taking on, so there is little concern about possible defaults.
And if you are concerned about the number of people still in tolerance (because of the rules during the pandemic banning execution by banks), you should know that there is no risk of causing a turnaround in the real estate market today. There will not be a flood of foreclosures.
2. People are not using their homes as ATMs as they did in the early 2000s
As mentioned above, when prices were rising rapidly in the early 2000s, many thought it would never end.
They started borrowing against the equity in their homes to finance new cars, boats, and vacations.
When prices began to fall, many of these homeowners were underwater, leading some to abandon their homes. This increased the number of foreclosures.
Homeowners have not forgotten the lessons of the crisis, as prices have skyrocketed in recent years. The Black Knight reports that equity (the amount of equity available for owners to access before reaching a maximum loan-to-value ratio of 80%, or LTV) more than doubled in comparison with 2006 (US$ 4.6 trillion to US$ 9.9 trillion).
The Last Homeowner Equity Insights from CoreLogic reveals that the average homeowner earned $ 55,300 in home equity (equity value) last year alone.
Odeta Kushi, deputy chief economist at First American, reports:
"Homeowners in the fourth quarter of 2021 had an average of US$ 307,000 in equity - a historic high."
ATTOM Data Services also reveals that 41,9% of all foreclosed homes have at least 50% equity. These owners will not face an underwater situation, even if prices drop a bit. Today, owners are much more cautious.
See an article with more arguments: 3 Charts that show we are not in a real estate bubble
Are you in doubt?
Now that you know a little more about the behavior of the real estate market and the differences between the current price increase and the real estate crisis of the early 2000s you can consider investing in vacation homes in orlando. To take advantage of all the tips we have brought to you and go even deeper, you can talk directly to our relationship agents. They are always willing to talk to you with any questions you may have about investing in Florida.
In this text we approached the theme the behavior of the real estate market during recessions because it is interesting for those looking to invest in Florida. If you want to read more content like the one we brought in this article, just stay tuned here on our blog.
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