Housing market on fire: 5 reasons why this boom has nothing to do with the last one

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A decade after the housing market came out of a deep downturn, housing is hot again. Indeed, house values ​​are skyrocketing to new highs.

With its double-digit appreciation and rampant bidding wars, the latest real estate party bears some eerie similarities to the last.

“This is clearly the strongest real estate market we have seen since the global financial crisis,” Federal Reserve Chairman Jerome Powell said recently.

However, Powell sees no evidence of a bubble, a view shared by many economists. The Consensus: Home values ​​may stop skyrocketing, but they won’t fall.

“I don’t think the prices are going to drop significantly, but they could stay stable for a while,” said Mark Zandi, chief economist at Moody’s Analytics on Wednesday.

Housing economists and mortgage specialists point to compelling reasons to believe this housing boom will end with a soft landing rather than a crash. Five reasons why this real estate boom is different from the previous one:

1. Lying loans are long gone.

During the lending frenzy of 2005-2007, anyone could borrow almost any amount of money, regardless of the size of their down payment or the health of their credit rating.

Lenders offered “no documentation” mortgages – commonly referred to as “lying loans”. And borrowers have indeed lied, sometimes at wacky levels.

In a mortgage fraud case filed in South Florida in 2008, FBI agents and federal prosecutors presented real whoppers. A part-time cashier at a grocery store inflated her income on loan applications from $ 13,000 to $ 344,000 so she could qualify for $ 1.3 million in loans on a lavish house in a gated community. Another borrower earning $ 25,000 a year as a hotel employee reported earning $ 594,120 to get $ 1.8 million in mortgage on a McMansion.

These are extreme examples, of course, but they reflect an era of historically loose lending standards. The Mortgage Bankers Association’s mortgage availability index hit a record high of 800 during this bubble, then plunged to a fraction of that level during the crash.

Now the lying loans are gone, says Chuck Mathewson, branch manager at LowRates.com in Charlotte. “In fact, you have to prove your ability to repay the loan, whereas with subprimes, you have nothing to prove,” he says.

2. Questionable lending practices are gone.

It wasn’t just the buyers who pushed the envelope during the last bubble. Lenders and mortgage brokers have engaged in all kinds of abuse.

Subprime mortgages generated big commissions for mortgage brokers, and mortgage brokers were forced to put borrowers into loans they couldn’t afford. Lenders eagerly issued toxic loans, knowing they would offload them to investors.

“The mortgage industry was really unregulated,” recalls Steve Nakash, managing partner at Cherry Creek Mortgage. “Lenders regulated themselves. Mortgage-backed securities were self-regulating. Wall Street buyers regulated themselves. It has gotten to a point where if there is no regulation, you are going to have fraud. “

After the global financial crisis of 2008 and 2009, Congress intervened to curb the predatory practices that led to the crash.

Now, says Nakash, “It’s almost impossible to do anything that even looks like to benefit the consumer.”

3. Construction cranes are fewer and more widely spaced.

During the last real estate bubble, developers embarked on a residential construction frenzy. Construction cranes dotted the horizons of the Sun Belt.

When the bubble burst, builders stopped building – and they didn’t pick up anything close to their pre-crash pace. Housing starts have slowed for years.

“Housing starts are still 23% below January 2006 levels, leaving the US real estate market 3.8 million single-family homes below what is needed to meet demand,” says Todd Abraham, portfolio manager senior at Federated Hermes. “This is hardly an environment that fosters widespread overbuilding and financial speculation.”

4. Price gains are happening everywhere.

During the peak of 2005 to 2007, increases in house prices were concentrated in coastal areas and in a few cities in the interior, such as Las Vegas, Denver and Phoenix. The boom essentially ignored Texas and the Rust Belt – house prices in large areas of the country barely budged.

This time around, the house price increases are spread widely across the country. From February 2020 to February 2021, home prices jumped 13% in Cleveland, 12% in Detroit and 11% in Dallas, according to the S&P CoreLogic Case-Shiller Home Price Index.

None of these markets experienced double-digit growth in the previous boom. The more evenly distributed gains reflect a housing market driven not by local speculation but by a wider imbalance of supply and demand.

5. Demographic trends are a tailwind, not a headwind.

In 2005, Gen Xers were reaching their first years of home buying. There was only one problem: Generation X was not very tall, certainly not compared to the baby boomers that came before them.

Much of the demand during the last bubble was fueled by baby boomers buying multiple homes and enterprising Gen Xers becoming real estate barons.

Today, the millennial generation is in prime time for household formation. Unlike Generation X, this is a large age cohort. According to the Pew Research Center, there are 62 million millennials, compared to just 55 million Gen X.

Meanwhile, the current real estate boom is accompanied by an explosion of Hispanic buyers. This group is expected to become a major force in home buying in the years to come.

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