Many consumers have on their minds what happened in 2008; that what’s happening today will follow the same trajectory as what happened in 2008. However, when we look at today in comparison to 2008, we start to see a little bit of a different picture. Economist, Dave Rosenberg says,
“What 9/11 has in common with what is happening today is that this shock has also generated fear, angst and anxiety among the general public. People avoided crowds then as they believed another terrorist attack was coming and are acting the same today to avoid getting sick. The same parts of the economy are under pressure — airlines, leisure, hospitality, restaurants, entertainment — consumer discretionary services in general.”For full article click here
So, when we take the same approach to the Dotcom and 9/11 crash, we see a different picture from what happened in 2008 with the housing and mortgage crash. We see the S&P correction during that time of about 45 percent but during the same time in 2000, 2001, and 2002, we actually see home price appreciation, which is very different from what happen in 2008. We have to remember, the 2008 crash was caused by the meltdown of the housing and mortgage market, which is not the case today.
So how does the home price appreciation compare between now and then. Well when we look back to the six years leading up to the housing crash, we know we had high appreciation but we are no where near those levels of appreciation today. While prices are rising, what we don’t have is runaway appreciation.
We should also look at the Mortgage Credit Availability (how easy it is to get a loan). Let’s look at the data used by the Mortgage Bankers Association, which measured this date on a monthly basis. The larger the number the easier it is to get a loan. So what we see on the left side of the below graph is that loans were easier to get at the time of the housing bubble. Today there are tighter guidelines making it harder to get a loan.
We have to remember as well, that people were using their homes as ATM’s pre-bubble taking equity out of their homes, putting it into depreciating assets, buying vacations, going on trips, financing lifestyles and thinking this is never going to end. The three years leading up to the 2008 crash there was $824 billion dollars cashed out of homes as refinances. Not so today… the three years leading up to today that number is but a third of this at $232 billion, a fraction of what it was back then.
We also know that 53.8 percent of all the homes in this country have at least 50 percent equity. We know that because 37 percent of the homes are owned free and clear, and when you take the remaining homes, 26.7 percent of those have at least 50 percent equity.
Next, let’s talk about inventory. Entering this year, the biggest challenge we were prepared for in the housing industry was inventory, literally not enough homes on the market for the number of people that wanted to buy a home. So, if we take a balanced market of six months and we look back to 2007, we know there were just over eight months of supply of inventory on the market leading us to a buyer’s market. Today, we’re at 3.1 months of inventory on the market. We literally don’t have an oversupply of homes on the market for people that want to buy them… a much different scenario from 2008.
Last but not least, let’s look at how much income is needed to purchase a home. What we know pre-bubble is that number was a lot higher than what it is today. Buyers in 2006 needed 25% of their income to purchase a home, while today it is just under 15%.
So what we know today entering into this year is that the strength of the housing market is well positioned to help bring us out of this economic crisis. Sure it isn’t going to happen overnight, but the real estate market is positioned for a strong market come third and fourth quarter of this year.