It’s hard to believe it’s been nearly 10 years since the housing market took a turn for the worse. At the time it seemed chaotic, but it’s now clear what happened. The market was correcting and as a result, we saw a sharp downturn in home prices between 2007 and 2011. Things improved slowly over the next few years until recently, when prices starting rising much more rapidly. That has caused many buyers and sellers to assume that we must be heading toward another housing bubble.
At times like this, it’s important to address these concerns. Some think we may be susceptible to another downturn of equal scale, not realizing that the current state of the mortgage market is much different from that of 2006. Here’s why we don’t support the notion that another credit crisis is imminent:
Anyone who went through the mortgage process years ago and then again recently, can tell you that things have changed. Gone are the days when a buyer could simply state their monthly income instead of documenting it with paystubs and tax returns. We now request documentation for the source of a bank deposit, income received through a rental property owned with a partner, and much more. All of these demands stem from a new guiding principle in the modern banking era: the ability to prove that you can repay your mortgage.
Credit availability and mortgage programs have had no choice but to fall in line with regulatory requirements. Banks can no longer offer negatively amortizing or interest-only loans without first having the borrower pass a dramatic series of qualification tests. Teaser rates and artificially low payments cannot be used to facilitate affordability. Banks have been discouraged to make loans to borrowers with lower credit scores and significant derogatory events, and as a result, there are simply fewer loan options available to consumers.
Because a potential buyer undergoes a much more rigorous approval process than before, there are comparatively fewer buyers who are qualified to obtain a home loan. In 2006, we can assume a good percentage of buyers used a loan program with lower requirements that is no longer available. Today, just about every buyer who makes an offer on a home is either highly qualified to repay the loan or is an all cash buyer who is not using a loan at all. Either way, it’s good news. That means the current rise in home prices is not due to a surplus of home shoppers, but rather an increase in demand and competition among highly qualified buyers who are ready to move.
When looking at the real estate recovery that’s been underway since approximately 2012, it’s convenient to assume that it can’t go on forever. In reality, cycles have always been part of the housing market. While we don’t attempt to time the market or calculate the scale of any correction that may or may not be imminent, we can definitively say that the conditions that existed 10 years ago are no longer a characteristic of today’s market. At RPM, we are committed to making loans of the highest credit quality to borrowers who demonstrate an ability to repay them. And this, in our opinion and experience, has always been more a component of a fundamentally sound market than a burgeoning bubble.