INVESTMENT

Will today’s healthy credit markets help prevent crashes?


Nowadays the rapid rise in real estate prices (and the constant talk of a bubble) with all the news, it is normal to see a match with 2007. In fact, housing prices have risen at a rate closer to 2007 than last year, according to the case-rock index.

I’ve written extensively about how supply, demand, and low interest rates create a perfect storm of appreciation right now. But I would like to share some additional information that shows that the bubble of 2000 and the initial driver of the financial crisis, the credit markets are much healthier today.

Although the price increase is comparative, the underlying causes of the price increase are very different. Thus, when the fear of a bubble and subsequent explosion is justified, the foundations of the housing market remain stable.

What is the cause of the last bubble?

In the mid-2000s, the bubble was largely driven by the purchase of speculation enabled by loose credit standards. Check out this excellent chart from the Urban Institute, which explains the problem very well. The chart measures the percentage of single-family homes that are likely to be the default.

Default risk

Between 2003 and 2007, mortgage lenders drastically relaxed their credit standards. This loose credit has enabled buyers who have not been able to pay for their services to buy increasingly expensive homes. The rest is history. Risky debt has crashed, bringing down much of the housing market and financial system.


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Now why are things different?

The government has since enacted strict rules to control how banks and financial institutions can lend. And as the chart above shows, we are in a period of relatively tight credit. This means that those who are getting mortgages can usually repay those mortgages every month.

If you look at the more granular and recent data from the Mortgage Bankers Association, it shows that mortgage availability has become tougher since the onset of the epidemic. Credit availability has declined in the spring of 2020 and recovery has recently begun.

But even as credit standards have modestly relaxed, we are still not far from where we were before the epidemic and far from the state of the credit market that enabled bubbles and explosions in the mid-2000s.

What does this mean for the housing market?

To me, this information confirms my belief that the housing market is wild but fundamentally healthy.

Although we hear stories of bidding wars and the sale of tens of thousands of dollars worth of property – even more than a thousand dollars, the people who buy these houses are paying in cash or are in a good position, comparatively speaking, features to pay off debt.

Things need to change sooner or later – this level of inflation is unhealthy and unstable. But the data will continue to grow, not in the form of crashes.



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