It has been 10 years since the great American housing crisis that began in 2006 and came to a halt in 2008. In the past decade, best-selling books, Academy Award-nominated film and countless business school lectures have been devoted to dissecting what happened and how to avoid a repeat of history. During this period, 10 million families who lost their homes due to foreclosures and many more affected by the crisis struggled to rebuild their life and their financial credits. It has not been an easy recovery for the housing industry and for many homebuyers.
Since 2008, federal regulations were put in place, mortgage practices – especially but not limited to subprime lending – have been tightened considerably, and home prices came back closer to earth in many markets. Well, prices were closer to earth, until recently.
Largely due to the historically low interest rates, an improving economy and a decade’s worth of pent-up demand from potential buyers who could not afford to buy or have chosen to stay on the sidelines, home prices got hot again across the country. They got very hot, very quickly throughout 2016. In January 2017, the S&P CoreLogic Case-Shiller Home Price Index recorded a 5.9% jump in average home prices from a year ago, marking a 31-month high. The rates of home price increases have so far outpaced wage growth. According to a recent Fitch Ratings report, many of the country’s top real estate markets are currently over-priced by double-digit percentages based on local economic fundamentals including population, real housing demand and wage growth.
As home prices and interest rates increase, more homebuyers appear to be dipping into risker mortgage loans to buy their homes. Total shares of adjustable-rate mortgage loans now make up 9% of all new loan applications, a recent high that doubles pre-election levels. Perhaps under increasing home price pressure, more Americans now express willingness to go over their budget in order to secure a home. According to a latest homebuyers study by Owners.com, 55% of homebuyers surveyed are willing to go over their budget; on average, they are willing to go over their budget by nearly $40,000, which is substantial.
While it is too premature to panic about these latest figures on home prices and flexible mortgage lending, American homebuyers seem to have taken notice. Tracking the latest ValueInsured Modern Homebuyer Survey results from June 2016 to January 2017, Americans have become less confident that the 2008 housing crisis would be an once-in-a-lifetime event:
- In June 2016, 47% of all Americans surveyed were confident that the 2008 housing crisis will not happen again in their lifetime; three months later in September 2016, 44% survey were confident (-3 percent points from June); then most recently in January 2017, only 41% were confident (-3 percent points from September)
- In June 2016, 61% of all Millennials surveyed were confident that the 2008 housing crisis will not happen again in their lifetime; three months later in September 2016, 59% survey were confident (-2 percent points from June); then most recently in January 2017, only 48% were confident (-11 percent points from September)
- Overall, nearly 6 in 10 Americans (59%) now lack the confidence that a 2008-style housing crisis will not happen again in their lifetime
The FHA recently reported a jump in mortgage delinquencies for the first time since 2006. The FHA insures low-down payment home loans, which are popular among first-time homebuyers and more susceptible to housing risk exposure with their lower level of home equity. There are also more headlines lately whispering about trends toward another housing crisis, for example this one and this one. With all signs pointing to a record-breaking Spring 2017 for housing, and possibly two to three more interest rate hikes by the Fed this year, it will be interesting to watch closely if homebuyers will keep buying, and if or when their confidence jitters may take over.