Ever since the big housing bubble burst back in 2008, concerns have been high. Some analysts are even suggesting that we are getting ready to see a new burst soon. However, looking at the details tells a different story as the concern is with a slow rise in wages (being only at 2% annually) and the average pricing for homes rising faster with a 4% increase.
The difference between 2008 and now is the housing bubble is in a different credit environment.
The biggest problem started in 2006 when 20% of the market was made up of “subprime mortgages”. A “subprime mortgage” is a mortgage made to consumers who have less-than-perfect credit. It was found that some banks even turned subprime mortgages into their entire form of business. Then in 2008, those who received a subprime mortgage began making late payments or no payments at all and this occurred at a high rate. That was when banks started to collapse, especially those who relied on subprime mortgages as their main business.
This had a domino effect when insurance companies who insured these subprime mortgages started suffering from lack of payments received. Once houses began foreclosing, that brought property values down around them and it spread like wildfire between 2008 and 2010. Lessons have been learned since then and while the environment with a slow wage increase and a fast price increase seems scary, the credit environment is different.
Banks have learned from their past mistakes, making it a tighter process to receive credit approvals. That tight approval process has actually increased the number of cash sales in the housing market. Another difference is that before the burst in 2008, home sales ran at 8.5 million per year and home construction volume topped 2 million annually. Today, home sales are only nearing 5 million and new home construction is just over 1 million units. Another saving grace is the fall of the mortgage balance. Homeowners are paying their mortgages on-time and fewer people are looking for a cash-out refinance making this a good time to sell your home.
The question is, does this mean we’re safe from another bubble burst?
The environment does prove to be an improved one for both buying and selling homes right now. While the wage vs. price increase rate is something to keep an eye on, it doesn’t necessarily mean that a burst is about to occur. Instead, it shows that houses will steadily rise and could possibly flatten out over the next two years. Another promising feature of the economy of real estate these days is the increase in jobs. Job creation allows income levels to rise thus making homes more affordable.
Only time will tell how the market will look down the line. Though for the time being, there seems to be no bubble burst in sight. Instead, it looks to be like one of the best housing markets we’ve had in a decade.