At the same time that mortgage rates are rising, the once red-hot housing market is chilling. House prices are still historically high, but there are concerns that they may now be eased as well.
All of this is questioned by people as follows: Is the housing market today in the same predicament as it was more than a decade ago when the 2007-08 crash caused the Great Recession?
The simple answer is: No. Today, the American housing market is in much better shape. This is in part due to the new lending regulations that resulted from the meltdown. These rules lay a much stronger foundation for today’s borrowers.
The average borrower FICO credit score for 53.5 million First Lien mortgages in the United States today is a record high of 751. It was 699 in 2010, two years after the collapse of the financial sector. Lenders are much more strict about lending, much of which is reflected in the quality of their credit.
House prices have also skyrocketed due to pandemic demand over the last two years. This gives homeowners today a record amount of home wealth. According to mortgage technology and data Black Knight, the amount of cash borrowers can take out of their homes with 20% equity left on paper, the so-called tappable equity, is the highest total this year. It has reached 11 trillion dollars. Provider. This is a 34% increase from a year ago.
At the same time, the leverage of how much debt a homeowner has to the value of a home has dropped dramatically.
Currently, total US mortgage debt is less than 43% of current home prices, the lowest ever. There is virtually no negative equity if the borrower is borrowing more than the value of the home. Compare this to more than one in four borrowers who were submerged in 2011. Only 2.5% of borrowers have less than 10% of their home wealth. All of this provides a great cushion if home prices actually fall.
Currently, there are 2.5 million floating rate mortgages (ARMs), which are currently unpaid and represent approximately 8% of active mortgages. This is the lowest volume on record. ARM can usually be modified in a period of 5, 7, or 10 years.
In 2007, just before the housing market collapsed, there were 13.1 million ARMs, 36% of all mortgages. Underwriting of these types of loans was rough at the time, to say the least, but new regulations after the collapse of the home changed the rules.
Not only is ARM today undertaken by fully indexed interest rates, but more than 80% of today’s ARM origins operate at fixed interest rates for the first 7-10 years.
“For sale” outside the home in Hercules, California, USA, Tuesday, May 31, 2022. Homebuyers are facing a deterioration in affordability, with mortgage rates centered around the highest levels in more than a decade.
David Paul Morris | Bloomberg | Getty Images
Currently, 1.4 million ARMs are facing higher rate resets, so given the higher rates, these borrowers will have to make higher monthly payments. It’s definitely a risk. But in 2007, about 10 million ARMs faced higher resets.
Mortgage arrears are currently at record lows, with just under 3% of mortgages overdue. Even with the surge in delinquency in the first year of the pandemic, there are fewer overdue mortgages than before the pandemic. Pandemic-related mortgage grace programs have helped millions of borrowers recover, but those programs still have 645,000 borrowers.
Andy Walden, Vice President of Enterprise Research at Black Knight, said: “Even millions of homeowners who took advantage of tolerance during a pandemic have generally been doing well since leaving their plans.”
However, there are about 300,000 borrowers who have run out of pandemic-related tolerance programs and are still delinquent. In addition, while mortgage arrears have historically been low, they tend to be higher these days, especially with regard to recent loan composition.
“We want to monitor this population move forward,” Walden said.
According to the Mortgage Bankers Association, mortgage availability is well below the level just before the pandemic, still suggesting strict standards. But since interest rates began to rise, lenders have lost about half of their business. That could mean being willing to lend to less creditworthy borrowers.
According to Black Knight, the biggest problem in the current housing market is the affordability of housing, which is at record lows in at least 44 major markets. Inventory is starting to grow, but it’s still about half the pre-pandemic level.
Daniel Hale, Chief Economist at Realtor.com, said: “Rising housing costs are starting to run out of some buyers’ budgets, so those who remain in the market can expect a relatively less competitive situation by the end of the year.”