Homeownership has become a major element in achieving the
American Dream. A recent report from the National Association of Realtors (NAR)
finds that over 86% of buyers agree homeownership is still the American Dream.
Prior to the 1950s, less than half of the country owned
their own home. However, after World War II, many returning veterans used the
benefits afforded by the GI Bill to purchase a home. Since then, the percentage
of homeowners throughout the country has increased to the current rate of
65.5%. That strong desire for homeownership has kept home values appreciating
ever since. The graph below tracks home price appreciation since the end of
World War II:
The graph shows the only time home values dropped
significantly was during the housing boom and bust of 2006-2008. If you look at
how prices spiked prior to 2006, it looks a bit like the current spike in
prices over the past two years. That may lead some people to be concerned we’re
about to see a similar fall in home values as we did when the bubble burst. To
help alleviate those worries, let’s look at what happened last time and what’s
What Caused the Housing Crash 15 Years Ago?
Back in 2006, foreclosures flooded the market. That drove
down home values dramatically. The two main reasons for the flood of
Many purchasers were not truly qualified for the mortgage
they obtained, which led to more homes turning 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.
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.
1. Today, Demand for Homeownership Is Real (Not
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.
Data from the Urban Institute shows the amount of risk banks
were willing to take on then as compared to now.
There’s always risk when a bank loans money. However, leading
up to the housing crash 15 years ago, lending institutions took on much greater
risks in both the person and the mortgage product offered. That led to mass
defaults, foreclosures, and falling prices.
Today, the demand for homeownership is real. It’s generated
by a re-evaluation of the importance of home due to a worldwide pandemic.
Additionally, lending standards are much stricter in the current lending
environment. Purchasers can afford the mortgage they’re taking on, so there’s
little concern about possible defaults.
And if you’re worried about the number of people still in
forbearance, you should know there’s no risk of that causing an upheaval in the
housing market today. There won’t be a flood of foreclosures.
2. People Are Not Using Their Homes as ATMs Like They Did
in the Early 2000s
As mentioned above, when prices were rapidly escalating in
the early 2000s, many thought it would never end. They started to borrow
against the equity in their homes to finance new cars, boats, and vacations.
When prices started to fall, many of these homeowners were underwater, leading
some to abandon their homes. This increased the number of foreclosures.
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).
The latest Homeowner Equity Insights report from CoreLogic
reveals that the average homeowner gained $55,300 in home equity over the past
year alone. Odeta Kushi, Deputy Chief Economist at First American, reports:
“Homeowners in Q4 2021 had an average of $307,000 in
equity – a historic high.”
ATTOM Data Services also reveals that 41.9% of all mortgaged
homes have at least 50% equity. These homeowners will not face an underwater
situation even if prices dip slightly. Today, homeowners are much more
The major reason for the housing crash 15 years ago was a
tsunami of foreclosures. With much stricter mortgage standards and a historic
level of homeowner equity, the fear of massive foreclosures impacting today’s
market is not realistic.