History Is Not Repeating
Trauma has a way of lingering beyond the source of the trauma. Once you experience trauma, similar situations can flood you with memories and the same feelings you endured during your toughest times. For many of us, 2008 and the collapse of the real estate market was nothing short of trauma. Millions of Americans lost their homes. These were not just random people. These were our friends, our families, and for some it was ourselves. On the heels of the collapse of the housing market, the global economy crashed along with it resulting in the Great Recession. For over a year, many have been claiming that we are on the verge of another such collapse. Many prognosticators believe that the pandemic has created the conditions for another crash. Thankfully, history does not always repeat itself. We learned enough from 2008 to make sure the real estate market is not collapsing.
Fears of Another Housing Market Crash
Since the beginning of the pandemic, many predicted that the economic fallout would include a real estate crash similar to 2008. The idea was that measures to control the pandemic would cause millions of Americans to lose their jobs. In turn, these same households would fall behind on rent and mortgage payments. This would lead to a wave of evictions and foreclosures that floods the market with available homes. As a result, home values would tumble and 2008 would repeat itself all over again.
Obviously, this did not happen. Governments saw the writing on the wall and took extreme measures to prevent this scenario from playing out. First, the government did what they could to make sure Americans could pay their bills, including rent and mortgage payments. They passed multiple rounds of massive stimulus bills that provided direct relief to families. Second, state governments and the federal government took direct action to prevent the waves of evictions and foreclosures. They instituted moratoriums on evictions and foreclosures to prevent those who were behind on their payments from being put out on the street. Third, the Federal Reserve slashed interest rates, which caused mortgage rates to tumble to historic lows. This created huge demand from home buyers, which pushed the real estate market to unexpected heights. Essentially, the federal government and state governments did all they could to prevent history from repeating itself and it worked.
Was the Can Kicked Down the Road?
While it is hard to doubt the efficacy of the actions taken to prevent the housing market from crashing, many predicted that the success would be temporary. After all, stimulus payments would not go on forever and moratoriums on evictions and foreclosures woud eventually end. These doomsayers predicted that once the pandemic relief measures come to an end that the real estate collapse they predicted at the beginning of the pandemic would materialize. The idea is that eventually, evictions and foreclosures will still happen and at that point, a market collapse that is the stuff of nightmares would become a very tangible reality.
For those who fall in this camp, many were looking to the end of this month to be the beginning of the end. The federal government’s moratorium on evictions and foreclosures would end, as well as the forbearance extensions. After all, a couple million households are still on mortgage forbearance programs. Are these doomsayers correct? Is a collapse of the housing market imminent? Thankfully, we do not think that they are correct and firmly believe that the real estate market has even more room to grow.
The Government Has More Tricks with Mortgages and Rent
The initial steps taken by federal and state governments is an indication that there is a serious desire by public servants to prevent a repeat of 2008 at all costs. There is no reason to assume that all measures will be removed and that doom will commence. Governments have shown the ability to adapt in the past. The moratoriums have already been set to expire on previous occasions, however, each time the government issued extensions. The same is true for the June 30th expiration. Within the past few days, President Biden extended all moratoriums through July 31st. This extension and previous extensions demonstrates a willingness to keep extending pandemic safety nets as long as they are needed.
Additionally, nearly every state is passing their own forms of moratorium extensions. Some states are going even further. California, for example, has extended their own moratoriums and is even paying past due rent for those impacted by the pandemic. These are extraordinary measures and there is no indication that they will stop anytime soon.
Lenders Have Incentives to Help Homeowners
Governments are not the only ones who are taking proactive steps to prevent a collapse of the real estate markets. Lenders are doing their part. Lenders make money based on providing home loans and collecting interest on these loans. These lenders can make more money long term by ensuring the viability of the mortgages they have issued and protecting home values. Many lenders have indicated that regardless of government moratoriums, that they are willing to work with homeowners to find a way for them to avoid foreclosure. In many ways, 2008 happened because lenders' hands were tied. There was simply little they could do to prevent hte wave of foreclosures that ended up toppling the global economy. Today, we are in a much different situation.
The Real Estate Market Isn’t a Bubble
One of the biggest reasons why we are not on the precipice of seeing 2008 repeat itself is that the housing market is fundamentally strong. Just because home values have increased dramatically it does not mean that we are in a bubble. There are a few fundamental differences between the real estate market pre-2008 and today’s housing market.
First, the demand from home buyers is real and is not dissipating. Mortgage rates have been hovering at rock bottom levels and home buyers are jumping at the chance to lock in home loans at tremendous values. Securing a mortgage at today’s rates can save homeowners significant money in monthly payments and over the lifetime of the loans. Rates should not be going up dramatically anytime soon and that means that the demand from home buyers will not be going away either.
Second, the types of mortgage products that makeup the vast majority of loans are very different from the pre-2008 real estate market. In the runup to 2008 a large portion of homeowners had subprime mortgages and adjustable rate mortgages. This created a dangerous combination and set up the ultimate collapse. Subprime mortgages are given to home buyers who cannot qualify for traditional mortgages. They either do not have the income, the credit score, or have too much debt to qualify for traditional home loans. Many home buyers purchased their homes using these subprime mortgages. Adjustable rate mortgages lock home buyers into initially low rates that jump as mortgage rates increase. When homeowners who do barely have the income to pay their current mortgage payments suddenly see them increase because of rate changes, foreclosures are on the horizon. The commonplace nature of these loan types laid the foundation for 2008.
Third, lenders are far more selective today than they were in the early 2000s. Many of the subprime and adjustable rate mortgages that were doled out prior to 2008 were something we refer to as NINJA loans. NINJA loan is shorthand for no income, no job, and no assets. Functionally, lenders were providing home loans to individuals without verifying their income, their employment status, or even their debt-to-asset ratios. People were being given mortgages without any verification that they would be able to handle their mortgage payments, let alone when rates increased. In today’s red hot real estate market, lenders have been incredibly selective with who they provide mortgages. It has been difficult to get a mortgage without high credit scores, high income, and low debt. This means that a vast majority of homeowners are financially stable and able to deal with any market hiccups.
Simply put, today’s real estate market is nothing like 2008. Worrying about a 2008-style housing market collapse makes little sense given how different today’s housing environment is from the past.
Final Thoughts
We are all familiar with the adage that those who fail to learn from history are doomed to repeat it. Thankfully, governments, lenders, and even consumers seemed to have learned a lot of lessons from 2008 and are doing all they can to prevent it from happening again. While it is possible that there could be a wave of foreclosures and evictions on the horizon, there is no reason to believe that it would collapse the housing market. The strong demand from home buyers would mean that houses that hit the market will be scooped up quickly. Additionally, the strong financial situation of most homeowners means that it should not lead to a domino effect in which more and more Americans lose their homes. At worst, an increase in evictions and foreclosures will merely slow down rising prices giving home buyers a better chance.
If you have been worrying about history repeating itself and this has been keeping you from buying a home, it is time to take a deep breath and relax. Today’s real estate market is strong and you should have no fear buying the house of your dreams. As long as you pick a house within your budget and have a plan to comfortably make your mortgage payments, you have nothing to worry about. Instead of delaying your decision to buy a home, it makes more sense to do it now while mortgage rates are low.
While 2008 was traumatizing, do not let the horrors of the past cloud your vision of the future. Instead, take advantage of this tremendous real estate market and get a home of your own. If you are interested in doing just that, contact us. The team at Peoples Choice Mortgage is ready to make your dream of owning a home a reality.
