Most likely, the events of 2008 won’t repeat themselves.
Many headlines compare today’s real estate market to that of 2008 due to rising inflation and the recent housing boom. What’s the good news? Experts concur that history is unlikely to repeat itself.
There are three significant differences between the current market and that of 2008:
- There will most likely be no housing “bubble.”
- Mortgage eligibility is now subject to more stringent regulation.
- The financial situation of homeowners has improved since 2008.
There is no “bubble,” according to experts.
A “housing bubble,” commonly known, was the root cause of the crisis of 2008. In a real estate bubble, home prices rise sharply and unexpectedly for a brief period, followed by a steep fall in demand. The reason it’s referred to as a bubble is that the market cannot support the sky-high home prices, and the rate at which they are rising cannot continue forever. That is to say, at some point, property prices will fall as the bubble bursts.
It’s critical to keep in mind that a bubble differs from an active real estate market.
This abrupt market shift was the market bubble bursting. On the other hand, the last two years of competition (2020–2022) and recent mild cool-downs show a much more balanced rise and fall.
Reduced oversight of the mortgage industry contributed significantly to the 2008 housing bubble. Since then, the Consumer Finance Protection Bureau (CFPB) has invested in extensive laws to support the prevention of further crashes. Mortgages have gotten substantially more difficult to obtain in the last fifteen years.
- Borrowers were far more likely to be approved for home loans with no down payment.
- Subprime mortgage loans could still be given to buyers who only met a few requirements.
- Mortgage-backed securities accounted for almost 60% of all home loans.
- Borrowers were not required to demonstrate their ability to repay the home loan before closing on their property as long as the house had a sufficient appraised value. They were frequently qualified on an initial interest rate subject to rapid hikes.
- Home values dropped by around 20% due to the sudden decline in demand for home purchases, known as “bursting the bubble.”
In the current market:
- Without making a down payment, borrowers are much less likely to be able to get a mortgage loan (except for certain VA and USDA Loans). Currently, cash or other forms of credit can be used to finance down payments.
- There are now stiffer requirements for eligibility, particularly in terms of required credit ratings.
- In 2018, only 4.5% of all house loans were secured by mortgage-backed securities. These days, conventional loans and loans backed by the government are both far more frequent and much safer options.
- Prospective borrowers must show that they can repay the loan before approval.
- Even though it has changed recently, the demand for homes has remained largely constant.
For many prospective first-time buyers, the requirements for credit scores and bigger down payments may be discouraging, but these restrictions help prevent the occurrence of another housing bubble.
New owners and buyers have taken on a new image.
Since 2008, the demographic profile of homebuyers and owners has changed due to stricter criteria, like creditworthiness and down payment amounts. In sum, they’re in a much better position to become homeowners and successfully handle their mortgages.
In the years preceding 2008:
- 720 or higher credit scores were only held by 25% of buyers.
- A borrower’s mortgage debt could be between 70 and 100 percent of their available income.
- Interest-only loans, loans with early payoff penalties, and unexpected balloon payments hurt many borrowers. This, along with sharply falling home values, made it nearly impossible for them to refinance or sell their homes.
- There was a large amount of household debt in relation to available income.
- Building equity was incredibly difficult for owners since they had to pay so much for their mortgage loans, and many borrowers had debts greater than their homes’ value.
In the market today:
- Most buyers – 75% – have credit scores of 720 or higher.
- Mortgage debt accounts for approximately 65% of a borrower’s disposable income.
- The terms of every mortgage loan must be fully disclosed to the borrowers, and balloon payments are virtually unheard of.
- In contrast to previous years, personal debt has decreased by 30% relative to disposable income.
- Owners have a more substantial say in the home financing process and are better equipped to build equity.
- There may still be opportunities for borrowers in less-than-ideal financial conditions, but overall, house loan applicants are financially stronger and better equipped than those in 2008. These purchasers are more aware, prepared, and realistic, with higher credit scores and more secure loan types.
Three Differences Between This Real Estate Market and 2008
According to industry experts, the real estate market today is fundamentally different from that of 2008. Modern inflation, interest rate changes, and shifting buyer demographics all have an impact, but much of the heavy lifting was done after the recession when CFPB implemented extensive regulation to prevent a similarly disastrous housing bubble. Therefore, whether you’re concerned about getting an adjustable-rate mortgage or improving your credit score, you may feel at ease knowing that it’s unlikely that history will repeat itself.
Regardless of the state of the market, Three Rivers Lending is here to assist. Whatever the nature of the market might be in, you can count on us to be here to help you through it. You can get in touch with us via phone, email, or through our online form.