Why This Housing Market Is Not a Bubble Ready To Pop
Back in 2006, foreclosures flooded the market. That drove down home values dramatically. The two main reasons for the flood of foreclosures were:
Many purchasers were not truly qualified for the mortgage they obtained, which led to more homes turned into foreclosures.
A number of homeowners cashed in the equity on their homes. When prices dropped, they found themselves in an underwater situation (where the home was worth less than the mortgage on the house). Many of these homeowners walked away from their homes, leading to more foreclosures. This lowered neighboring home values even more, and this cycle continued for years.
Why Today’s Real Estate Market Is Different
Here are two reasons today’s market is nothing like the one we experienced 15 years ago.
Today, Demand for Homeownership Is Real (Not Artificially Generated)
Running up to 2006, banks were creating artificial demand by lowering lending standards and making it easy for just about anyone to qualify for a home loan or refinance their current home. Today, purchasers and those refinancing a home face much higher standards from mortgage companies.
People Are Not Using Their Homes as ATMs Like They Did in the Early 2000s
Homeowners didn’t forget the lessons of the crash as prices skyrocketed over the last few years. Black Knight reports that tappable equity (the amount of equity available for homeowners to access before hitting a maximum 80% loan-to-value ratio, or LTV) has more than doubled compared to 2006 ($4.6 trillion to $9.9 trillion).
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