From high prices and low inventory to a backlog of new home construction, the 2021 real estate market is hot, and homes are selling fast. With the unpredictable market and COVID-19 still affecting the economy, it may appear that we are headed to another housing crisis, but we believe that it is not the case.
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The 2008 Housing Crisis
The housing market was booming in the 2000s and demand increasing at monumental rates. As a result of rising home prices and an effort to match the demand, lenders began to approve mortgage loans for homebuyers with few qualifications. As a result, many homeowners could not afford these mortgages, defaults rose, and banks could not afford to pay off all of this debt. Since many homeowners could not afford their mortgages or sell their home in the dying market, many owners defaulted on their loans. As a result, this brought much more inventory into the housing market, and prices plummeted due to the large supply. As a result, this caused a ripple effect in the economy and the Great Recession began.
Why 2021 is Different
The memories of the 2008 recession are still fresh in many minds. Due to low-interest rates and loose mortgage lending standards, when the housing market burst more than nine million families lost their homes between 2006 to 2014. The housing market took over a decade to recover and some have not fully recovered yet.
With our economy still healing after the coronavirus, it may appear that our booming market may be heading in the direction of the 2008 housing crisis, but that is not likely for these reasons:
Pandemic Mortgage Forbearance
During the housing crisis of 2008, the foreclosures were linked closely with areas that had weak labor markets as well. While COVID-19 did lead to unemployment numbers rising, the effects of mass unemployment bear little resemblance to 2008, thanks in large part to the pandemic mortgage forbearance programs currently in place. As of early Spring 2021, more than 2 million homeowners participated in a mortgage forbearance program until they could resume their pre-pandemic employment. While some homeowners could still lose their homes to foreclosure due to serious delinquencies, the defaults will go nowhere near the 6 million defaults following the 2008 recession.
Higher Standards for Mortgage Lending
A major factor leading to the 2008 housing crisis was the lenient mortgage lending to unqualified homebuyers. These low standards lead to the downfall of many high-profile banks and mortgage companies, forcing Congress to make significant adjustments to the mortgage lending process. Today, standards have been raised and the process is much more transparent in terms of checking a borrower’s assets, income, and credit checks. These changes have improved the housing market and made it much safer to invest.
Equity refers to the difference in the value of what the current market value of your home is versus the amount that currently owe. Equity is often used as an incentive to stay in your home longer. For example, if the value of your home rises, your equity will grow as well. For homeowners, this provides a level of cushion from default if prices were to fall. In today’s market, the average family with a mortgage had over $190,000 in home equity and homeowners in Indiana gained an average of $28,000 over the course of the year. The market in 2009 was the opposite with many mortgaged homes valued under what owners actually owed.
The real estate market is currently shaken up due to the coronavirus and economic recovery. Real estate is always changing and while the market may grow and dip, we don’t predict a 2021 housing crisis or market crash. Homeownership is still a possibility and with low-interest rates – it could be a great time to buy. If you’re interested in starting your homebuying journey, the team at Metropolitan Title is here to assist.