4 Reasons Why Today’s Housing Market Is NOT 2006 All Over Again

With home prices rising again this year, some are concerned that we may be repeating the 2006 housing bubble that caused families so much pain when it collapsed. Today’s market is quite different than the bubble market of twelve years ago. There are four key metrics that explain why:

  1. Home Prices
  2. Mortgage Standards
  3. Mortgage Debt
  4. Housing Affordability

1. HOME PRICES

There is no doubt that home prices have reached 2006 levels in many markets across the country. However, after more than a decade, home prices should be much higher based on inflation alone.

Frank Nothaft is the Chief Economist for CoreLogic (which compiles some of the best data on past, current, and future home prices). Nothaft recently explained:

“Even though CoreLogic’s national home price index got to the same level it was at the prior peak in April of 2006, once you account for inflation over the ensuing 11.5 years, values are still about 18% below where they were.” (emphasis added)

2. MORTGAGE STANDARDS

Some are concerned that banks are once again easing lending standards to a level similar to the one that helped create the last housing bubble. However, there is proof that today’s standards are nowhere near as lenient as they were leading up to the crash.

The Urban Institute’s Housing Finance Policy Center issues a Housing Credit Availability Index (HCAI).According to the Urban Institute:

“The HCAI measures the percentage of home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.”

The graph below reveals that standards today are much tighter on a borrower’s credit situation and have all but eliminated the riskiest loan products.

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3. MORTGAGE DEBT

Back in 2006, many homeowners mistakenly used their homes as ATMs by withdrawing their equity and spending it with no concern for the ramifications. They overloaded themselves with mortgage debt that they couldn’t (or wouldn’t) repay when prices crashed. That is not occurring today.

The best indicator of mortgage debt is the Federal Reserve Board’s household Debt Service Ratio for mortgages, which calculates mortgage debt as a percentage of disposable personal income.

At the height of the bubble market a decade ago, the ratio stood at 7.21%. That meant over 7% of disposable personal income was being spent on mortgage payments. Today, the ratio stands at 4.48% – the lowest level in 38 years!

4. HOUSING AFFORDABILITY

With both house prices and mortgage rates on the rise, there is concern that many buyers may no longer be able to afford a home. However, when we look at the Housing Affordability Index released by the National Association of Realtors, homes are more affordable now than at any other time since 1985 (except for when prices crashed after the bubble popped in 2008).

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Bottom Line

After using four key housing metrics to compare today to 2006, we can see that the current market is not anything like the bubble market.

What if I wait until next year to buy a home?

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We recently shared that national home prices have increased by 6.7% year-over-year. Over that same time period, interest rates have remained historically low which has allowed many buyers to enter the market.

As a seller, you will likely be most concerned about ‘short-term price’ – where home values are headed over the next six months. As a buyer, however, you must not be concerned about price, but instead about the ‘long-term cost’ of the home.

The Mortgage Bankers Association (MBA), Freddie Mac, and Fannie Mae all project that mortgage interest rates will increase by this time next year. According to CoreLogic’s most recent Home Price Index Reporthome prices will appreciate by 5.2% over the next 12 months.

What Does This Mean as a Buyer?

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If home prices appreciate by 5.2% over the next twelve months as predicted by CoreLogic, here is a simple demonstration of the impact that an increase in interest rate would have on the mortgage payment of a home selling for approximately $250,000 today:

 

Bottom Line

If buying a home is in your plan for this year, doing it sooner rather than later could save you thousands of dollars over the terms of your loan.

How Much Has Your Home Increased In Value Over The Last Year?

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Home values have risen dramatically over the last twelve months. In CoreLogic’s most recent Home Price Index Report, they revealed that national home prices have increased by 6.7% year-over-year.

CoreLogic broke down appreciation even further into four price ranges, giving us a more detailed view than if we had simply looked at the year-over-year increases in national median home price.

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The chart below shows the four price ranges from the report, as well as each one’s year-over-year growth from February 2017 to February 2018 (the latest data available).

It is important to pay attention to how prices are changing in your local market. The location of your home is not the only factor that determines how much your home has appreciated over the course of the last year.

Lower-priced homes have appreciated at greater rates than homes at the upper ends of the spectrum due to demand from first-time home buyers and baby boomers looking to downsize.

Bottom Line

If you are planning to list your home for sale in today’s market, find a local agent who can explain exactly what’s going on in your area and your price range.

Buying a new home? Here are some red flags to watch out for!

Red flag No. 1: Too much scent

Don’t let those freshly baked cookies or potpourri simmering on the stove fool you. The more aggressive the scent, the greater the likelihood the seller is taking precautions to mask a more offensive odor. When there is too much going on in the scent deparment, you might wonder what they are trying to hide.

Take a deep whiff in every room you enter, and look closely at walls, ceilings, and flooring for signs of pet accidents, mildew, or smoke.

 

Red flag No. 2: Poor tiling

Inspect the tile in kitchens and bathrooms. If the gaps or tiles are slightly uneven, it may indicate a DIY job, which could make you think twice, especially if you the house was flipped. Lazy tiling could indicate that multiple fixes might have been done on the fly, which can add up to big bucks in potential repair costs.

 

Red flag No. 3: Foundation issues

Most houses have hairline cracks, which just indicate the house is settling into its position, but large gaps signal a bigger issue with the foundation.. Other tipoffs: sticking doors or windows, visible cracks above window frames, and uneven floors. How do you know if the floors are uneven? Roll a marble from one side to the other.

 

Red flag No. 4: Signs of deferred maintenance

Look for signs that the owner might have neglected routine home maintenance, such as burned-out light bulbs, long grass, leaky faucets, or faded paint. These signs indicate the seller may have ignored other ongoing home maintenance tasks that can cause real problems down the road.

An attentive homeowner is going to flush the water heater annually, change air filters monthly, clean the chimney, inspect the roof for leaks, and regularly recaulk around windows and doors, for example, which will keep all those systems in good working order.

 

Red flag No. 5: Nearby water

That creek might look picturesque now, but it won’t when it comes cascading through your back door. The increasing unpredictability of weather means that it’s vital to consider the possibility of flooding. We've seen people unable to ensure their house against flood risk, which can create giant damage bills on a regular basis.

 

Red flag No. 6: Wonky windows

Take a second to pull back the curtains to check for lopsided frames, and then give the windows a tug to make sure they slide easily. If they stick, it could be a sign of foundation issues, as noted above, or just poor installation.

The only fix for that—and it’s an expensive one—is new windows.

 

Red flag No. 7: Mold

To detect possible signs of mold while wandering through an open house, discreetly open bathroom and sink cabinets to take a look around water pipes or drains. Even small black or gray spots indicate that more serious issues may be lurking. You can also check the caulking around faucets and tubs for black spots, and look for patches on the ceiling.

 

Red flag No. 8: Water damage

A musty odor can indicate water damage, even if you don’t see standing water. Check walls and ceilings for water lines; they likely indicate flooding from a leak or a burst pipe that may have caused internal damage. Also, take a peek at exposed piping in basements or laundry rooms, and check for rust, water stains, or leaking.

 

Red flag No. 9: Cosmetic enhancements

That one freshly painted wall could be an accent wall, or it could be hiding something like a patch of mold.

 

Red flag No. 10: Improper ventilation

Without adequate interior ventilation, moisture sticks around, which can create mold and increase allergies. The tipoff: Look for condensation on windows or slightly bubbled or peeling paint around windows, doors, or vents. This can indicate moisture in the walls and ceiling drywall.

The bottom line: Don’t walk through an open house the way you walk through a museum. Even though your home inspector is likely to detect many of these problems down the line, being attentive to these red flags in an open house ensures that you’re not wasting your time on a home that isn’t the one for you.