Margaret E. from Conroe, TX asks: Hi Mitch, I’m seeing a new report every month about falling home sales and home prices. I purchased a house just a couple of years ago, so I have a good interest rate. But now I’m worried that home prices are going to crash like 2008, to the point where I would owe more on the house than it’s worth. What’s your take? Thank you.
Mitch’s Response:
Thank you for sending in your question! I’m sure your concerns are shared by homeowners across the country since you are right to point out that existing home sales and prices have fallen from peaks.1
In your case, however, having purchased a home a couple of years ago likely means you enjoyed rapid equity gains during the pandemic housing boom. Consider that according to the Urban Institute, total mortgage debt has risen by 15% since 2007, but home equity has risen by +131% over the same period. A meaningful portion of that equity run-up happened in 2020 and 2021.
In my view, people who bought a home in the past six months or a year may want to keep an eye on home prices relative to their outstanding mortgages, but at the same time, I think it’s prudent to have a time horizon of at least five years when buying a home. We may see more weakness in the housing markets as mortgage rates went from 3% at the beginning of 2022 to north of 6% now, but over time I think supply and demand dynamics support higher prices in housing.
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More specifically to your situation, I was able to pull home price data from the Houston area, which you can see below. Assuming that you purchased your home sometime in 2020, you likely captured solid equity gains in your first two years, whereby a pullback is happening from high levels.
Home Price Index for the Houston Area (Year-Over-Year % Change)
Home Price Index for the U.S. (Year-Over-Year % Change)
I think ongoing strength in the U.S. jobs market is likely to make any economic weakness in 2023 fairly mild, with a shallow recession a possibility. I would not expect anything close to the recession experienced in 2008-2009. But another reason I do not think housing is headed for a crash is that lending standards are now far more stringent than they were in the early 2000s.
A big driver of the housing crash that started in 2005 was that many mortgages were approved with little-to-no scrutiny of borrowers’ income, in some cases providing financing to people without seeing so much as a previous year’s W-2.
In the current market, obtaining a loan requires borrowers to provide an exhaustive accounting of income, liquid assets, liabilities, and other information needed to ensure the debt can be repaid. Additionally, the days of banks creating pools of risky mortgages and trading them as securities are largely over, with few of those securities in existence today. Given the runup in prices and high down payments, CoreLogic estimates that housing prices would have to fall between 40% and 45% to put the same percentage of people underwater on their mortgage as there were in the aftermath of the 2008 Global Financial Crisis.
We may see some more downside pressure on housing prices from here, but I think the U.S. economy and markets will prove more resilient than many expect. As long as you have a reasonably long-time horizon to be in your home (5-10 years minimum), I would not worry too much.
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Disclosure