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Are We Heading Toward Another Housing Crisis?
It’s been about 10 years since the housing bubble burst and the Great Recession began, but the events that happened during that time are still fresh on many investors’ minds. In the last couple of years, we’ve seen dramatic growth in several major housing markets, along with ballooning costs for home ownership. These factors, along with others, have made many wonder if we’re heading toward another housing crisis. It’s a valid concern, and one that I’m hoping to dispel today by highlighting some of the major differences between today’s climate and the one that preceded the Recession.
First, let’s talk about the lending situation, because what was happening back in 2005 is WAY different than what’s going on with mortgages today. In 2005, subprime mortgages were fairly commonplace, and people with poor credit were able to secure a loan fairly easily. This, of course, is largely to blame for the bubble bursting, because these loans resulted in way too much outstanding debt and the banks couldn’t handle it.
Today, however, subprime loans make up a much smaller segment of the market and mortgages in general are of a higher quality. Banks have tightened their lending requirements, making it much more difficult for people with bad credit or insufficient income to obtain a mortgage. In fact, the average credit score of borrowers who are able to get a mortgage is currently 739. In 2005, it was 686. With stats like these, you can see that banks are being much more selective about who they lend to. They are performing their due diligence in ensuring that their borrowers are indeed capable of repaying the loan
To further understand the difference between 2005 and today, we need to look at how things have shifted in terms of housing. In 2005, new construction was at a high, with nearly 1.3 million new homes popping up in markets all across the U.S. Today, it’s a much different story. New homes are still being built, but at a slower rate. We’re no longer building homes just to build them, and then handing them over to people who can’t afford them. Inventories in many markets remain tight, and this results in the price appreciation that we’re currently seeing in many markets.
Coupled with this slower growth in construction is the fact that more and more people are choosing to rent instead of own a home. There are a lot of reasons for this, with one of the biggest being affordability. As mentioned, housing prices have been rising steadily over the last few years, but incomes have not been increasing at a corresponding level. This makes it much harder for people to save money for down payments and other housing-related costs. There’s also a convenience factor that comes with renting. Homeownership is typically viewed as a long term commitment, and there’s a lot of responsibility that goes with it, too.
Hopefully this has alleviated some of the concerns that we’re on track for another housing crisis. My belief is that a crisis similar to what happened a decade or so ago is NOT going to happen again, at least not anytime soon. The facts show that the current climate is drastically different from that in 2005, particularly in regard to loans being given to people who, quite frankly, should never have gotten a mortgage. It’s also important to remember that there will always be ups and downs in the market, and real estate will undoubtedly be impacted by that. However, history has shown us that real estate remains one of the stable investments you can make, as well as one of the most profitable. Diversify, spread your risk, and make your investment decisions carefully, and you should be able to weather whatever the market brings.
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