I sometimes wonder, with so little equity mined this cycle, if it’s still early innings for the housing market. At least in terms of the next collapse.
Sure, home sales volume has plummeted thanks to unaffordability, fueled by high home prices and significantly higher mortgage rates.
But do we still need a flood of HELOCs and payoffs before the market inevitably overheats again?
Otherwise, it’s just an unaffordable market that will likely only become more affordable as mortgage rates fall, home prices stagnate, and wages rise.
Where’s the fun in that?
Homeowners were maxed out in the early 2000s
If you look at mortgage debt outstanding today, it really hasn’t increased much over the past 16 years, when the housing bubble popped.
It skyrocketed in the early 2000s, thanks to rapidly rising house prices and zero down financing.
And a stream of cash-out refinances that went all the way to 100% LTV and above (125% financing anyone?).
Basically, home owners and home buyers back then borrowed every penny possible and then some.
Either they were making payments every six months on higher valuations, fueled by sloppy home appraisals, or they took out a HELOC or home equity loan behind their first mortgage.
Many also buy investment properties with no money down, and even without documentation.
Whatever it was, home buyers back then always maxed out their borrowing capacity.
It was a kind of move back then. Your loan officer or mortgage broker would tell you how much you could afford and you would max. There was no reason to hold back.
If it wasn’t affordable, the stated income would just be listed higher to make it pencil.
Making matters worse were faulty home assessments that allowed property values to go up and up and up.
Of course, it wasn’t long before the bubble burst and we saw an unprecedented flood of short sales and foreclosures.
Many of these mortgages were written off. And much of that money was used to buy discretionary toys, whether it was a new speedboat or a lobster or ironically, a second home or rental property.
Most of it was lost because it was simply not affordable.
And it didn’t have to be, because the majority of the loans back then were taken out with declared income loans or no doc loans.
Outstanding mortgage debt is low compared to the early 2000s
Today, things are very different in the housing market. Your typical homeowner has a 30-year fixed mortgage. Maybe they even have a 15-year fix.
And there’s a good chance they have a mortgage rate somewhere between two and four percent. Maybe even lower. Yes, some homeowners have rates that start with “1”.
Many of them also bought their properties before the big price increase before the pandemic.
So the national LTV is somewhat ridiculously low under 30%. In other words, for every $1 million in home value, a borrower owes only $300,000!
Just look at the chart from ICE showing the massive gap between debt and equity.
Consider that your average homeowner has a ton of equity that is mostly untapped, with the ability to take out a new mortgage and still maintain a large cushion.
Long story short, many existing homeowners took on very little mortgage debt relative to their property values.
Despite this, we continue to suffer from an affordability crisis. Those who have not yet bought in often cannot afford it.
Both house prices and mortgage interest rates are too high to qualify new home buyers.
The problem is that there is little reason for house prices to ease because existing owners are in such a good position. And there are too few vacant properties for sale.
Given how high prices are and how poor affordability is, some believe we are in another bubble. But it’s hard to get there without funding.
And as mentioned, funding has been fairly untouched. It has also been very conservative.
In other words, it is difficult to have a widespread crash where millions of homeowners fall behind on their mortgages.
At the same time, existing homeowners value their mortgages more than ever because they are so cheap.
In short, their current home payment is the best option they have.
In many cases it would be much more expensive to rent or buy a replacement property. So they stay put.
Do we need another increase in mortgage lending to bring down the housing market?
So how do we get another housing market crash? Well, I’ve been thinking about this a lot lately.
Although housing is not the “issue” this time as it was in the early 2000s, consumers are getting excited.
There will come a time when many will have to borrow from their homes to afford daily expenses.
This may mean taking out another mortgage, such as a HELOC or home equity loan.
Assuming this happens en masse, you could see a situation where mortgage debt explodes higher.
At the same time, housing prices may stagnate and even decline in certain markets due to continued unaffordability and weakened economic conditions.
If that happens, we could have a situation where homeowners are overextended again, with less equity to serve as a cushion if they fall behind on payments.
Then you could have a housing market full of properties that are much closer to being maxed out, similar to what we saw in the early 2000s.
The big difference, of course, would still be the quality of the underlying mortgages.
And the first mortgages, which if kept intact would still be super cheap fixed rate mortgages.
So even then, a major housing crash seems unlikely.
Sure, I could see the newer home buyers who didn’t get an ultra-low mortgage rate or a low purchase price walking away from their properties.
But the bulk of the market is not the home owner this time. Sales volume has been low since both high mortgage interest rates and high prices took hold.
The point here is that we may still be in the early stages of the housing cycle, as strange as that sounds.
That is, if you want to base it on new mortgage debt (borrowing) this cycle.
Because if you look at the chart above, it’s clear that today’s homeowners just haven’t borrowed much at all.
Before creating this site, I worked as an account manager for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and existing) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
