Was 2022 a Housing Bubble? What About 2023?
Was 2022 a Housing Bubble
In 2022, The National Association of Realtors reported that the majority of consumers believe that we may be in a housing bubble. That survey can be read here. As home prices continued to increase and appreciation was in double digits, it makes sense to worry about a bubble. The real estate market in 2022, however, was vastly different from previous markets. In fact, in my 30+ years in the business, 2022 was unlike any I have ever seen. Here are 4 reasons why it was not a housing bubble.
Home Prices Increased But Rates Were Low
Affordability measures three components: the price of the home, wages earned by purchasers, and mortgage rates. Conventional lending standards say that a borrower should not spend more than 28% of their gross income on their mortgage payment. Fifteen years ago, home prices were high, wages were low, and mortgage rates were over 6%. Homes were not affordable. In 2022, home prices were still high. Wages, however, had increased, and mortgage rates were still low. This means that the average purchaser in 2022 contributed less of their monthly income toward their mortgage payment than when the US hit the last houses bubble. Affordability in 2023 has become an issue. Wages are down, interest rates are up and the lack of inventory is continuing to drive prices up. While I don’t think we are headed for a market crash and with an election year coming next year, I think there will be a bit of a break but it might take the rest of 2023 and into 2024 before the real estate market rebounds. This is still not a bubble or a crash though.
Mortgage Standards Were Much More Relaxed During the Boom
During the housing bubble, it was much easier to get a mortgage than it is today. As an example, the number of mortgages granted to purchasers with credit scores under 620 was much higher. According to credit.org, a credit score between 550-619 is considered poor. In defining those with a score below 620, they explain:
“Credit agencies consider consumers with credit delinquencies, account rejections, and little credit history as subprime borrowers due to their high credit risk.”
Mortgage standards are nothing like they were during the last housing boom. Purchasers that acquired a mortgage over the last decade are much more qualified. This played a roll in the crash.
The volume of mortgages issued to purchasers with a credit score of less than 620 during the housing boom was much higher than it has been in the 14 years since that boom.
Foreclosures
In 2020 and 2021 there were a large number of homeowners impacted by the forbearance program, which was created to help homeowners who were facing uncertainty during the pandemic. However, by late 2022, fewer than 800,000 homeowners were left in that program, and most of those were able to work out a repayment plan with their banks. Foreclosure starts have declined.
Rick Sharga, Executive Vice President of RealtyTrac, explains:
“The fact that foreclosure starts declined despite hundreds of thousands of borrowers exiting the CARES Act mortgage forbearance program over the last few months is very encouraging. It suggests that the ‘forbearance equals foreclosure’ narrative was incorrect.”
Why are there so few foreclosures now? Today, homeowners are equity-rich and not tapped out. In the run-up to the housing bubble, some homeowners were using their homes as personal ATM machines. Many immediately withdrew their equity once it built up. When home values began to fall, some homeowners found themselves in a negative equity situation where the amount they owed on their mortgage was greater than the value of their home. Some of those households decided to walk away from their homes, and that led to a rash of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of other homes in the area.
Homeowners, however, have learned their lessons. Prices have risen nicely over the last few years, leading to over 40% of homes in the country having more than 50% equity. Owners have not been tapping into that equity as was seen in the past. With the average home equity now at $300,000, what happened last time should not happen today. As the latest Homeowner Equity Insights report from CoreLogic explains:
“Not only have equity gains helped homeowners more seamlessly transition out of forbearance and avoid a distressed sale, but they’ve also enabled many to continue building their wealth.”
We Don’t Have a Surplus of Homes on the Market – We Have a Shortage
The supply of inventory needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will cause prices to depreciate. Anything less than that is a shortage and will lead to continued price appreciation. At the beginning of Q4 in the Portland Metro Area there was almost 3 months of available inventory. While this is higher than in the past two years, it still equates to a shortage. There were an abundance of homes for sale from 2007 to 2010 (many of which were short sales and foreclosures), and that caused prices to tumble. At the end of 2023, the shortage of inventory is causing an acceleration in home values despite higher interest rates. Will this change as we move into early 2024? Maybe.