You know when you have that closing and you boast about how it had 10 offers in 3 days and closed $30,000 over asking and then the… “enjoy it while it lasts,” “the world is coming to an end,” ‘I have zero knowledge about the market whatsoever, but let me tell you what’s going to happen‘ people start chiming in? I welcome their thoughts, but I am always interested to know where these insights came from. Who are these people? Have they been studying the market? Do they have recession flashbacks? Are they clairvoyant? Or are they simply what goes up must come down physicists?
I really think most of these people are the Isaac Newtons carrying some left over 2008 trauma. They feel like this is similar to 2005 and therefore a crash is inevitable. The truth is, none of us know what’s going to happen, but let’s talk about some of the significant differences between the 2005 market and this one.
One of the biggest differences in then versus now are the mortgage products available. Getting a mortgage then was like getting a job today. If you had a pulse and can show up sober, there was something out there for you. Now, you actually have to qualify and by that, I mean you have to prove you have income high enough to afford the payment, a sufficient credit score, assets; no more of this pick a payment on a stated income loan stuff. Okay, yes, I know there are some stated income products, but they are so rare.
Lending standards measure borrower risk and product risk. The higher the credit index, the easier it is to get a loan. See that credit index below (the graph that looks like a 15 story waterslide)? The credit index is significantly more conservative now than it was then. The red shadow mountain graph below, shows there was greater risk with borrowers and products. Product risk isn’t even on the graph now.
Americans have equity and a shit ton of it. The average equity on homes with mortgages is $216,000, double the amount people had in 2004. The appreciation drivers seem to be low inventory combined with low interest rates. The conditions feel similar to 2005, but the climate is different. The experts and economists think we are on pretty solid ground this time.
