No, the market isn’t set to crash in 2022
The housing market has been hot for the last year or so, with prices skyrocketing, inventory bottoming out, and buyer demand surging. But how hot is too hot?
It’s a valid question — especially for those who experienced the housing crash just over a decade ago.
Fortunately, conditions are very different from 2008. And as mortgage advisor Arjun Dhingra put it on a recent episode of The Mortgage Reports podcast, “You can feel safer in today’s market.”
Here are just a few ways the current housing market is more stable than that of years past.
Listen to Arjun on The Mortgage Reports Podcast!
5 Reasons the housing market won’t crash in 2022
According to Arjun Dhingra, a mortgage expert of more than 20 years, there are 5 key reasons we’re not headed for a housing crash in 2022:
- Lending standards are stricter
- Low-risk mortgages are the norm
- Homeowners have plenty of equity
- The job market is strong
- Struggling homeowners have more options
Let’s dig into each of those factors a little deeper.
1. Lending standards are stricter
One of the big problems back during the last housing crash was loose lending practices.
Mortgage lenders weren’t very strict about who they’d give money to, and they were often lending too much to those who couldn’t comfortably afford it.
Nowadays, it’s not so easy to get a loan. There are higher credit score minimums, more regulatory safeguards, and lenders are just generally better at evaluating a borrower’s ability to pay.
“Borrowers that apply for mortgages now really have to go through a pretty vigorous process,” Dhingra said on the podcast.
“You are asked for a lot more paperwork, and they really get into it with you to make sure that you qualify for the loan and that you are a responsible borrower who’s going to be in a position to repay the loan for as long as you have it.”
As a result, existing homeowners are better able to afford their loans and less likely to default than in years past.
2. More stable loan products are the norm
In that same vein, lenders are also focusing on more stable, less-risky loan products.
Back in the day, many borrowers were getting adjustable-rate mortgages, which, in the wrong hands, can be quite dangerous.
Today, 30-year, fixed-rate loans are the norm — a much more manageable product for most consumers’ budgets.
“Thirty-year, fixed-rate mortgages have seen widespread popularity,” Dhingra said. “Banks and investors have priced those loans more attractively because they want to entice people to take a long-term, fixed product where there’s no fluctuation, no movement, and a lot more payment certainty.”
In July 2021, adjustable-rate loans accounted for just 1% of all mortgage originations. The 30-year, fixed loan, on the other hand, made up a whopping 75%.
3. Homeowners have lots more equity in their properties
“Perhaps the most impactful difference is that borrowers are sitting on more equity than they ever had before — and definitely when compared to 10 years ago,” Dhingra said.
Equity is critical in an economic downturn. When your equity stake in a property is large, a decrease in prices won’t hurt as much. In many cases, you’d still make a profit if you decided to sell.
Back in 2008, however, most homeowners had very little equity.
Because they were allowed to buy homes with very little down, their equity stake was small. When home values dropped, it put them upside-down on their mortgages, owing more on the home than it was worth. This led to a wave of foreclosures, short sales, and other quick sales.
Today’s buyers are required to make larger down payments, which makes for higher equity stakes right off the bat.
Add to this the steady appreciation that homes have seen over the last decade, and most borrowers are sitting on a solid amount of equity should things turn sour.
4. Job losses aren’t comparable
Rampant job losses in the financial sector played a big role in the 2008 crash.
“The vast majority of them owned homes, and some of them owned multiple homes,” Dhingra said. “So when they lost their jobs and they had little money down on those homes in the first place, you saw a flood of homes enter into the market.”
This flood of foreclosures, short sales, and glut of inventory sent home prices plummeting, and many homes were sold for less than they were purchased for.
Fortunately, this time around, it’s quite a bit different.
While there were certainly major job losses during the pandemic, most of those stemmed from the service industry — a sector predominantly made up of renters.
For these reasons, “You didn’t see this glut of inventory come on and hit the market all of a sudden,” Dhingra said. “A lot of those renters went and either rented elsewhere, consolidated households, or did what they needed to do to survive.”
5. There are widespread forbearance options
It’s much easier for struggling homeowners to get back on their feet these days. When the pandemic hit, the government acted fast, instituting a national forbearance program that allows most borrowers to hit pause on their mortgage payments — sometimes for as many as 18 months.
This not only gives them a financial break when money’s tight, but it also lets many save cash as they wait for the economy to recover or their job returns. As Dhingra put it, “Many of them have been stockpiling cash while not having to make payments.”
The bottom line
If you’re worried about a potential mortgage crash, you’re not alone. Fortunately, the conditions just aren’t there this time around. Have more questions or concerns about the market? Talk to an experienced mortgage professional. They can help talk you through it.