The current state of the housing market showcases an exceptional level of strength when examining the numbers. In fact, it may be regarded as the most robust housing market in recent memory, if not the strongest one ever witnessed. There are two fundamental factors that provide evidence to support this assertion.
1. Current Mortgage Rates on Existing Mortgages
Let's begin by analyzing the prevailing rates on existing mortgages. According to the Federal Housing Finance Agency (FHFA), in the fourth quarter of the previous year, more than 80% of existing mortgages had rates below 5%. This statistic holds significant weight. To delve deeper, over 50% of mortgages boasted rates below 4% (refer to the graph below).
Despite media speculation regarding a potential foreclosure crisis or an increase in homeowners defaulting on their loans, it's important to consider the following: homeowners with favorable mortgage rates will exert considerable effort to maintain their current mortgages and stay in their homes. This determination arises from the fact that they would be unable to purchase another house or even rent an apartment at the same cost. Their current mortgage payments are more affordable. Even downsizing could incur higher expenses due to prevailing higher mortgage rates.
This aspect significantly contributes to the rock-solid foundation of today's housing market. The substantial number of homeowners enjoying low mortgage rates helps avert a crisis characterized by an influx of foreclosed properties flooding the market, as was witnessed in 2008.
2. Amount of Homeowner Equity
The second noteworthy aspect is the considerable equity held by Americans presently. Data from the Census and ATTOM reveals that approximately two-thirds (around 68%) of homeowners have either fully paid off their mortgages or possess at least 50% equity in their homes (refer to the chart below).
In the industry, the term "equity rich" is used to describe this scenario. This is significant because it contrasts with the situation in 2008 when some individuals faced the agonizing decision of abandoning their homes due to owing more on the property than its worth.
However, the present circumstances are different, primarily due to homeowners accumulating substantial equity in recent years alone. When homeowners possess such substantial equity, it acts as a safeguard against another surge of distressed properties entering the market, as observed during the previous housing crash. Consequently, it establishes an exceptionally sturdy foundation for today's housing market.
In Conclusion
The current housing market stands out as one of the most fundamentally robust markets in our lifetime. Homeowners are determined to preserve their advantageous mortgage rates, and they possess a significant amount of equity. These factors set the present situation apart from that of 2008, underlining the fundamental differences at play.
Credit @KCM
