As mortgage rates are rising, the once red-hot housing market is cooling down. Home prices are still historically high, but the worry now is that they will drop as well.
This is what everyone is asking: Is the housing market today the same as it was a decade ago, when the crash of 2007-08 caused the Great Recession?
The short answer is no. America’s housing market is in far better health today. This is thanks, in part, to new lending rules resulting from that recession. Those rules put today’s borrowers far more firmly in place.
For the 53.5 million first lien home mortgages in the US today, the average borrower’s FICO credit score is a record high 751. It was 699 in 2010, two years after the financial sector slowdown. Lenders have been very strict about lending, much of which is reflected in loan quality.
Home prices have also gone up in the past two years due to the pandemic-fueled demand. This gives today’s homeowners a record amount of home equity. So-called tapable equity, which is the amount a borrower can take out of their home while leaving 20% equity on paper, collectively hit a record high of $11 trillion this year, according to Black Knight, a mortgage tech and data provider. This is 34% higher than a year ago.
At the same time, leverage, which is how much debt the homeowner has against the value of the home, has fallen dramatically.
Total mortgage debt in the United States is now less than 43% of current home values, the lowest on record. Negative equity, which occurs when a borrower owes more on the loan than on the home, is virtually nonexistent. Compare this to more than 1 in 4 borrowers who were under water in 2011. Only 2.5% of borrowers have less than 10% equity in their homes. All of this provides a great cushion, if home prices really do drop.
There are currently 2.5 million adjustable-rate mortgages, or ARMs, outstanding today, or about 8% of active mortgages. This is the lowest volume on record. ARMs can usually be fixed for five, seven or 10 years.
In 2007, just before the housing market crash, there were 13.1 million ARMs, representing 36% of all mortgages. At the time, underwriting those types of loans was sketchy to say the least, but new regulations changed the rules after the housing crash.
ARMs today are not only underwritten for their fully indexed interest rate, but more than 80% of today’s ARM principals also operate under a fixed rate for the first seven to 10 years.
A “for sale” outside a house on Tuesday, May 31, 2022 in Hercules, California, US. Homebuyers are facing a deteriorating affordability situation with mortgage rates hovering around their highest levels in more than a decade.
David Paul Morris | Bloomberg | Getty Images
Today, 1.4 million ARMs are currently facing a higher rate reset, so given the higher rates, those borrowers will have to make higher monthly payments. This is undoubtedly a risk. But, in 2007, about 10 million ARMs were experiencing high resets.
Mortgage delinquencies are now at record lows, with only less than 3% of mortgages outstanding past. There are fewer past due mortgages than before the pandemic, with a sharp jump in crimes during the first year of the pandemic. Mortgage forbearance programs related to the pandemic helped millions of borrowers recover, but those programs still have 645,000 borrowers.
“The mortgage market is in a very historically strong position,” said Andy Walden, vice president of enterprise research at Black Knight. “Even the millions of homeowners who have availed themselves of tolerance during the pandemic are doing well since abandoning their plans.”
However, there are about 300,000 borrowers who have ended pandemic tolerance programs and are still delinquent. Furthermore, while mortgage delinquencies are still historically low, they have been trending higher recently, especially for loan originations recently.
“We would like to keep an eye on this population going forward,” Walden said.
According to the Mortgage Bankers Association, mortgage credit availability is far below where it was just before the pandemic, suggesting strict standards. But lenders have lost nearly half their business as rates begin to rise, and that could mean they become more aggressive in lending to less credit-worthy borrowers.
According to Black Knight, the biggest problem now in the housing market is home affordability, which is at a record low in at least 44 major markets. While inventory is starting to rise, it is still about half of pre-pandemic levels.
“Rising inventory will eventually quell home price growth, but double-digit momentum has shown remarkable sticking power so far,” said Danielle Hale, chief economist at Realtor.com. “As higher housing costs begin to maximize some buyers’ budgets, those who remain in the market can expect relatively less competitive conditions later in the year.”