Are we are heading for another 2008-type crash? I've been helping people buy and refinance homes for 20 years, and here I share two reasons why this market is different from 2008 and two concerning data trends to keep an eye on.
Inventory is a huge factor in the current market. From 2005 to 2007, inventory went from a five-month inventory up to an eleven-month inventory. A balanced market has about six months of inventory. It's not really a buyer's market nor is it a seller's market; it's considered a healthy market.
What we're dealing with right now is a less than two-month inventory of homes. If a balanced inventory is around six months of homes, we have not had a true balanced inventory in about ten years!
Changes in Mortgage Standards following the 2008 crash:
• Mortgage Program Changes - no doubt about it, there were entirely too many loans available in the mid-2000's
, that contributed to the home crash.
• Documentation Changes - It's important to remember that credit standards have changed. There has been an incredible amount of reform and additional guidelines around sound lending practices. Now the average credit score for a homebuyer is over 700. Additionally, there are a substantial number of underwriting guidelines that have to be met, not just considering a home buyers documentation, but also their ability to repay, in order to get a qualified mortgage.
• Separation of lenders and appraisers – The separation of lenders and appraisers helps protect appraisers from being unduly influenced by lenders to meet a certain value.
All these practices have been put into place to insulate the industry from the factors that led up to the 2008 crash, but it's not all sunshine and roses.
There are two main areas of concern that homebuyers need to be aware of:
Inflation – It has a major impact on interest rates. Interest rates are based off of mortgage bonds, and mortgage bonds lose their value during inflationary times. What investors require to buy them is a high rate of return. That high rate of return pushes interest rates up. As long as inflation is in the news, interest rates are going to suffer and will try to out pace that inflation. The hope is that the Federal Reserve's response, as far as raising the Fed's funds rate to try to get a handle on inflation, will ultimately help interest rates, but it's not helping us right now. Inflation impacts on general cost of living as well as interest rates are tightening budgets and are going to put a damper on the housing market. As a result, we should see some of the skyrocketing home values start to slow. My hope is that we will normalize, giving better opportunity for homebuyers who are waiting in the wings to get into the market and have their piece of the American dream.
Rising Rent $ - Another thing to keep in mind is that rising demand is causing rents to rise. In some markets, rents are outpacing even home price increases. Increased rent is further compounding the demand to own a home.
Keep in mind that there is not one right time to buy a home; it is a personal decision based on your goals and needs. While we can't fix the market, we can be aware of the dynamics at play. Know what is actually affecting the market and don't let fear drive your decision about purchasing a home. I'm here to help when you decide that the time is right for you.