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 happening today.

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 foreclosures were:

1. Many purchasers were not truly qualified for the mortgage they obtained, which led to more homes turning into foreclosures.

2. 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 Artificially Generated)

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 cautious.

Bottom Line

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.

There’s never been a truer statement regarding forecasting mortgage rates than the one offered last year by Mark Fleming, Chief Economist at First American:

“You know, the fallacy of economic forecasting is: Don’t ever try and forecast interest rates and or, more specifically, if you’re a real estate economist mortgage rates, because you will always invariably be wrong.”

Coming into this year, most experts projected mortgage rates would gradually increase and end 2022 in the high three-percent range. It’s only April, and rates have already blown past those numbers. Freddie Mac announced last week that the 30-year fixed-rate mortgage is already at 4.72%.

Danielle Hale, Chief Economist at realtor.com, tweeted on March 31:

“Continuing on the recent trajectory, would have mortgage rates hitting 5% within a matter of weeks. . . .”

Just five days later, on April 5, the Mortgage News Daily quoted a rate of 5.02%.

No one knows how swiftly mortgage rates will rise moving forward. However, at least to this point, they haven’t significantly impacted purchaser demand. Ali Wolf, Chief Economist at Zonda, explains:

“Mortgage rates jumped much quicker and much higher than even the most aggressive forecasts called for at the end of last year, and yet housing demand appears to be holding steady.”

Through February, home prices, the number of showings, and the number of homes receiving multiple offers all saw a substantial increase. However, much of the spike in mortgage rates occurred in March. We will not know the true impact of the increase in mortgage rates until the March housing numbers become available in early May.

Rick Sharga, EVP of Market Intelligence at ATTOM Data, recently put rising rates into context:

“Historically low mortgage rates and higher wages helped offset rising home prices over the past few years, but as home prices continue to soar and interest rates approach five percent on a 30-year fixed rate loan, more consumers are going to struggle to find a property they can comfortably afford.”

While no one knows exactly where rates are headed, experts do think they’ll continue to rise in the months ahead. In the meantime, if you’re looking to buy a home, know that rising rates do have an impact. As rates rise, it’ll cost you more when you purchase a house. If you’re ready to buy, it may make sense to do so sooner rather than later.

Bottom Line

Mark Fleming got it right. Forecasting mortgage rates is an impossible task. However, it’s probably safe to assume the days of attaining a 3% mortgage rate are over. The question is whether that will soon be true for 4% rates as well.

With today’s real estate market moving as fast as it is, working with a real estate professional is more essential than ever. They have the skills, experience, and expertise it takes to navigate the highly detailed and involved process of selling a home. That may be why the percentage of people who list their houses on their own, known as a FSBO or For Sale By Owner, has reached its lowest point since 1985 (see graph below):

Here are five reasons why selling with a real estate professional makes more sense, even in today’s hot market:

1. They Know What Buyers Want To See

Before you decide which projects and repairs to take on, connect with a real estate professional. They have first-hand experience with today’s buyers, what they expect, and what you need to do to make sure your house shows well.

If you don’t lean on their expertise, you may spend your time and money on something that isn’t essential. That’s because, in today’s low-inventory market, buyers are willing to take on more of the renovation work themselves. A survey from Freddie Mac finds that:

“. . . nearly two-in-five potential homebuyers would consider purchasing a home requiring renovations.” 

A professional can help you decide what you need to tackle. It’s not canned advice you could find online – it’s recommendations specific to your house and your area.

2. They Help Maximize Your Buyer Pool

Today, the average home is getting 4.8 offers per sale according to recent data from the National Association of Realtors (NAR), and that competition is pushing prices up. While that’s promising for you as a seller, it’s important to understand your agent’s role in bringing buyers in.

Real estate professionals have an assortment of tools at their disposal, such as social media followers, agency resources, and the MLS to ensure your house is viewed by the most buyers. According to realtor.com:

“Only licensed real estate agents can list homes on the MLS, which is a one-stop online shop of sorts for getting a house seen by thousands of agents and home buyers. . . . This is certainly one of many good reasons why the majority of home sellers decide to employ the services of a listing agent rather than going it alone.”

Without access to these tools, your buyer pool is limited. And you want more buyers to view your house since buyer competition can drive your final sales price higher.

3. They Understand the Fine Print

Today, more disclosures and regulations are mandatory when selling a house. That means the number of legal documents you’ll need to juggle is growing. That’s why Investopedia says:

“One of the biggest risks of FSBO is not having the experience or expertise to navigate all of the legal and regulatory requirements that come with selling a home.”

A real estate professional knows exactly what needs to happen, what all the paperwork means, and how to work through it efficiently. They’ll help you review the documents and avoid any costly missteps that could occur if you try to handle them on your own.

4. They’re Trained Negotiators

If you sell without a professional, you’ll also be solely responsible for all the negotiations. That means you’ll have to coordinate with:

• The buyer, who wants the best deal possible
• The buyer’s agent, who will use their expertise to advocate for the buyer
• The inspection company, which works for the buyer and will almost always find concerns with the house
• The appraiser, who assesses the property’s value to protect the lender

Instead of going toe-to-toe with all these parties alone, lean on an expert. They’ll know what levers to pull, how to address everyone’s concerns, and when you may want to get a second opinion.

5. They Know How To Set the Right Price for Your House

If you sell your house on your own, you may over or undershoot your asking price. That could mean you’ll leave money on the table because you priced it too low or your house will sit on the market because you priced it too high. Pricing a house requires expertise. Investopedia explains it like this:

“. . . There is no easy or universal way to determine market value for real estate.”

Real estate professionals know the ins and outs of how to price your house accurately and competitively. To do so, they compare your house to recently sold homes in your area and factor in the current condition of your house. These factors are key to making sure it’s priced to move quickly while still getting you the highest possible final sale price.

Bottom Line

There’s a lot that goes into selling your house. Instead of tackling it alone, let’s connect so you have an expert on your side throughout the entire process.