Will There be a Housing Market Crash?

Okay, well, let’s get to the episode topic for the day.

And that is, will there be a market crash? Well, there are two or three fundamental things we need to look at when we consider this question. The first is, what is the quality of the borrower? And that might be obvious to some of you at times, but it’s not always that obvious. You see, the quality of the mortgage borrower taking on that mortgage loan has a lot to do with the sustainability and capability or the capacity for them to maintain that loan. Meaning that they can make the monthly mortgage payments on an ongoing basis. So the question is, is are they qualified, well qualified or not at all? You see, back in 2008, I’m gonna refer to this from time to time, before the great recession of 2008, when we had that market crash that started in 2006. And I remember this very vividly. I, I watched it unfold, almost like watching the movie The Big Short, which is one of my favorite movies.

But it basically paints a very accurate picture of what happened back then. And the fact is, is that a lot of the people who were borrowing mortgage loans back then were not qualified. They shouldn’t have been given a loan. They just didn’t have the capability or the capacity, whether in terms of credit and or income. You know, there’s all these running jokes there, there are jokes where if you could fog a mirror, you could qualify for a mortgage loan. There were no income loans, stated Income loans, ninja loans, the no income, no asset, no job loans, also referred to as the Ninja Loan. You know, people were able to qualify with credit scores as low as 620 and sometimes even lower into the five hundreds, which is almost at rock bottom. ’cause The score doesn’t go to zero. The scores started about three 50 depending on which, you know which bureau you’re looking at.

So it’s important to consider the capacity and the qualification of the borrower. So back then, everybody, almost everybody could qualify for mortgage financing today. And for years now, credit scores have been much more robust. They have been stronger. So today we’re looking at credit scores, a median credit score of 768. This is according to the Federal Reserve in a, a report not that long ago, but back in late 2022. And this hasn’t changed much to today, but 768 was the median credit score in the United States for those taking out a mortgage. When you look at data coming from Fannie Mae, the average credit score for first time home buyers is 746. Very strong. Like anything in the seven hundreds is very good. Seven above seven 20 is considered, you know, very good credit. If you’re over seven 40, that’s considered excellent credit. So again, we’re talking about very well qualified people. So these people have the, the qualification criteria to qualify and, and hold and, and sustain a mortgage loan. So credit scores is an important thing, especially when you compare today’s environment compared to back in the early two thousands, from 2002, 2003, all the way up to 2006 when things really took a turn and that’s when credit dried up. So that’s, that’s the first thing I look at is what is the qualification and quality of borrowers today?

The next thing I like to look at is the amount of equity in homes today, because the more equity you have in a home, the more options are available to you as a property owner in terms of being able to refinance or sell and sell without having duress, meaning being upside down on the property and having a loss when it comes to the sale of that property. Property owners today are not in that situation where they are distressed sellers. There’s a lot of home equity out there. In fact, that started to turn around around 2012, so about 12 years ago when most markets around the country bottomed and then started to turn around in terms of price appreciation. We reached the bottom around 2011, 12 and 13, market specific, of course, but nationally speaking around 2012. And ever since then, we’ve had year over year over year home price appreciation.

So back then in 2012, you know, we had a total home equity nationally speaking of somewhere around $9 trillion. If you look at where a home equity is today, you know, early 2024, late 2023 we’re hovering around the $33 trillion mark. I mean, think about that. Massive amount of equity nationally speaking. Now of course, the mortgage loans, the amount of debt that are on these properties nationwide have also increased. But on a graph, that curve is pretty flat. Like it’s increased year over year since about 2015, 2016. But right now, as of the end of 2023, that debt hovered around $13 trillion. Compare that to the 33 trillion that we find in home equity. It’s a huge differential. So there’s a lot of equity out there, a lot of options. Many people are feeling equity rich. And even in situations where there is distress, there are options out there to refinance or sell the property without taking a loss.

You know, there’s not a lot of distress or duress on people’s part when it comes to having that home equity. And just look at what happened on the landscape of equity appreciation on properties. If you bought a property in January of 2000, you compared that property to today, you would’ve had, again, I’m talking nationally speaking here, you would’ve had $415,000 in home equity if you bought a property back in January of 2000. Comparing it to, you know, where we are at today. Again, national numbers. That’s incredible. You really think about it. And if I look at this in different points of time, for example, looking at it, if you bought a property just before the last housing market crash in 2006, that led up to the Great recession back then comparing to where equity is today, you would have $339,000 in home equity if you bought right before the crash at the peak of the market in 2006.

That’s a lot. Think about that. Now, what if you bought a property at the point where we started to turn around in 2012, 2013 at kind of the the trough of the market? Well, you would’ve had a $344,000 in home equity buying in 2013 compared to where we are today. Here’s the interesting fact I find about this in terms of equity. If you bought at the beginning of 20, 24 years ago, about four short years ago today, you would have $209,000 in home equity. Again, nationally speaking. Now, if you actually remembered what I said, if you bought in 2000 January, 2020 years ago, 24 years ago, having $415,000 in home equity and compare that to buying just four short years ago, in 2020 half of the equity that you would’ve had compared to that property you bought way back in 2020, or excuse me, in 2000 half of it, half of that equity happened in the last four years.

We’ve had such an acceleration in home prices and home equity over the last four years. It’s incredible. It made up half of the entire amount of equity going all the way back to January, 2020. So the point of all this is this, I mean, these are interesting numbers, especially when you compare 2020 to 2013, the bottom of the market to 2006, the top of the market compared to 2000, which was around the time of, you know, the last market low. It’s just incredible to see how much equity has been gained over the last 24 years, as well as how much of it came in the last four years. But the point of all this is this, people are pretty much equity rich today. You know, it’s, there’s just a lot of equity out there. 66% of America owns their home and homeowners have had major surges in, in their net worth, and they have far more disposable income now than they’ve had in many years past.

So it’s just a very interesting place to be. But all that extra home equity provides options for people. So we find ourselves nationally speaking in a situation where we’re equity rich. Second borrowers are very well qualified with credit scores averaging in the 700 range, the median scores in the 700 range. And last but not least, you know, we’ve got to consider the supply and demand dynamics. There is a lot of demand still out there for housing demand, far exceeds supply. We still have a shortage if you listen to things that are said by those who are in the know and that are spending literally billions of dollars on housing. Like John Gray, for example, who’s the president of Blackstone, he just said earlier this year in January, the end of January, he said the overall backdrop is a housing shortage in the us And he’s talking specifically about single family homes like residential, but single family specifically.

Now, because of that, they’re considering venturing out into the multifamily space because of the weakness in residential. And their choice is not to just start acquiring more tens of thousands of single family homes, which they could do and they have done. But now they’re, they’re considering multifamily to add to their positions of single family homes. And don’t forget, John Gray’s, the guy who started invitation homes back in 2012, basically at the bottom of the housing market 12 years ago. Perfect timing, very smart move. You know, Blackstone has, has capital inflows well into the hundreds of billions of dollars over the years. And so they’ve got the capital to deploy and invest in single family homes and, and in residential. And this is a guy who’s worth $7 billion according to Bloomberg. So he’s no dummy, but that’s the backdrop. We have a housing shortage.

And so because of that, and this is where I kind of conclude my argument, that we are not going to have a housing market crash. Nothing like what most people think of in terms of a crash or what they envision, but the issue is this, right now our existing housing supply is very low. We are hovering just over a million units of existing inventory in the country, nationwide. Nationwide. And our historic average going back to 1982, has been 2.24 million. So right around two, you know, 2.2, 2.3 million household units of inventory that is needed. You know, this, this is a long term average, keep that in mind, but we need somewhere around 1.7 million units per year. Right now, I’ve seen different numbers around 1.5, 1.6 million, 1.7. I mean, it’s, it’s, it’s in that range, but we’re hovering with an existing inventory of just over 1 million units right now.

It’s far too short. So that means that supply is too short, too small demand is going to push prices up, continuing to push prices up. And once we start to see mortgage rates inch their way down, they’re gonna come down slowly. But over time, as we see that, it’ll provide more fuel and fodder for the housing market and we’ll see sales increase, we’ll see more activity and that activity we’ll spur an increase in price appreciation because again, we’re not keeping up on the supply side of this equation. So, you know, the problem is, is the existing housing supply remains near cycle lows as we head into the springtime, which we’re basically there, and it’ll follow through in the summer. And if rates start to fall, you know, over the next three, four months, you’re gonna see that accelerate as well. So this is why I remain bullish on housing, and I don’t foresee a housing market crash in the foreseeable future.

It’s just the fundamentals are too strong and just is not there. I I just don’t see it happening. That is it. Well, I appreciate you taking the time. I hope you enjoyed this 15 minute episode. I’m gonna try to keep doing these micro topics, if you will, going forward. Remember to connect with one of my investment counselors. If you want to talk about real estate or consider building a new portfolio or expanding your existing real estate portfolio, just contact us at noradarealestate.com. You can call us by phone, you can email us, you can just fill out the form on the website. We’ll have an investment counselor get in touch with you. No cost, no obligation. Our services are free. So you have everything to gain, nothing to lose. We’re here to help. And don’t forget to subscribe to the show. Make sure you hit the subscribe button wherever you are so you never miss an episode. And that is it for this week. I want to thank you for your time and we will see you on the next episode.