Monday, March 23, 2020 / by Andy Mandel
With all the volatility in the market and all the craziness going on in the news with COVID-19 and the coronavirus, a lot of people think we're heading for a housing crash similar to what we had in 2008. A lot of people still have PTSD about buying at the wrong time, and that's extremely understandable. And nobody knows the future, but I'm here to give you five reasons why the economy today is not like what it was in 2009.
Before we get into the five reasons, we have to explain what a recession is, because that's what most people's fear is is that we're going into a global recession. A recession is defined as two consecutive quarters of negative or zero GDP, which is economic growth. Now, because everyone has been told to shelter in place or to social distance themselves, people are spending a lot more time at home which means they're spending a lot less money out at shops, bars, malls, things like that. So that's of course going to slow down economic growth for the foreseeable future. So those are gonna be a couple months where we have a lot slower economic growth, so it's gonna be very understandable if that pushes the world into a global recession. But I want to be clear. A recession does not equal a housing crisis.
Let's get into the five reasons why the economy today is not the same as it was in 2008.
Number one, mortgage standards are a lot higher now than they were back then. We're gonna put up the mortgage availability index which shows you how easy it was to get a mortgage. As you can see, before the last recession, the mortgage availability peaked, meaning it was super easy to get a mortgage. If you could breathe, they were giving you a mortgage. As you can see now, it is much, much lower, so it's much harder to get a mortgage today than it was back then. They're checking people's credit. They're checking tax returns, verifying income and employment. So they're making sure that people who are getting these mortgages have good jobs, and they're not just making up their income, like they were back then.
Number two, prices are not soaring out of control. We've had a very good run as far as a price appreciation for homes goes over the last couple years which has been great for home sellers. But if you compare this to the previous six years to the six years leading up to the last housing burst, you'll see that the highest rate of appreciation is still lower than the lowest rate of appreciation on the six years running up the last housing burst. A normal home appreciation over the last hundred years or so has been 3.6%, so we're still a good amount over what's been historically normal but nowhere near where we were in the six years running up to the previous housing burst.
Number three, we don't have a surplus of homes on the market. Home prices are driven by supply and demand. Now, the previous recession was caused by a burst in the housing market, and a lot of people were forced to put their home for sale, and all that flood of inventory was what decreased the prices of homes because a lot more supply, demand remains the same, is gonna drive down the price of homes. As you can see now, we are in a shortage of homes for sale. It is not the same as it was back then.
Number four, homes just became too expensive to buy. The home affordability formula has three components: price, wages, and interest rates. So back then, prices were high, interest rates were high, and wages were a lot lower. Today, prices are still somewhat high, although lower than what they were back then, but wages are a lot higher, and interest rates are much lower than they were back then. That means the average family pays significantly less as far as their monthly take-home pay towards housing.
And number five, people just aren't using their homes like an ATM. One of the greatest features of homeownership is that you're able to borrow against the equity in your home to use that money and pay off other things, like college tuition, or to just do whatever you want with it. You can pay off high rate credit cards. You can buy a second property, a boat, things like that. And that's really what people were doing in the run-up to the last housing bust. They were taking all the equity out of their house, and they were using it to buy dumb stuff. They were buying boats. They were buying depreciating assets, and that's just not happening right now. Prices have risen very well over the last couple years, but I bet you didn't know that over 50% of homes in America have more than 50% equity because of that. If you look at the last three years and compare them to the three years running up to the last recession, you'll see that there is $500 billion less in cash-out refi's going on today than there were in those last three years. So people have more equity in a house. They are not taking the money out of their house. What that means is that even if prices do come down a little bit, people are much less likely to just walk away from their homes because they have a lot of equity in the property. We should not be seeing the same level of foreclosures and short sales that we saw back then hitting the market which is really what increased the downward pressure on prices.
One more stat, I just want to make sure everyone's clear that a recession does not equal a housing collapse. It's easy to understand why those two get conflated because of how bad the last recession was and because it was started by housing, but they are not the same thing. In fact, in three of the last five recessions, housing prices actually increased. The only one where it decreased significantly was the previous recession, and again, that one was because that recession was caused by the blow-up in the housing and mortgage market. So just because there's a recession does not mean that housing prices are gonna go into a freefall like they did the last time.
Now, no one has a crystal ball. I just wanted to make sure I was able to provide the facts for you on how the economy today is different than it was back then. If you have any questions, or if there is anything that I could do to help you out in these trying times, don't hesitate to give me a call, shoot me a text, send me an email. If you're looking to make a move in South Florida, I got your back.