Homeownership has become an important element in people’s pursuit of the American Dream. According to a recent study from the National Association of Realtors (NAR), over 86% of purchasers agree that homeownership is still the American Dream.
Before the 1950s, less than half of the nation lived in their own house. However, many returning veterans took advantage of the GI Bill’s provisions to buy a home after World War II. Since then, the proportion of homeowners throughout the country has steadily increased to 65.5 percent today. That strong desire for property ownership has kept house values from declining since then.
The only time in the last 76 years that home values fell so severely was during the housing bubble and burst of 2006-2008. It looked a lot like today’s inflation in prices back then, so some people today are concerned that we’re on the verge of another drop in house values similar to 2008. Let’s look a little closer…
What The Heck Happened?
The housing market was devastated in 2006. Foreclosures flooded the market, causing home values to plummet. The two primary reasons for the deluge of foreclosures were:
- Many purchasers were not qualified for the mortgage they obtained, which resulted in more houses entering foreclosure.
- A number of homeowners sold the equity on their houses. They hit an underwater situation when prices dropped (where the property was worth less than the mortgage on the house). Many of these homeowners abandoned their homes, causing additional foreclosures. This drove down home values even further in the neighborhood.
And this went on. For 2 years.
So Lloyd, What’s Different About This Housing Market?
Well, I’ll tell you. Two reasons:
1. Demand for Homeownership Is Driven by Purchasers, Not the Banks
Running up to 2006, banks were creating artificial demand by lowering lending standards and making it simple for almost anybody to qualify for a home loan or refinance their current homes. Today’s purchasers / refinancers have to meet much stricter criteria from lenders. And lenders are not making risky bets on borrowers anymore.
2. Your Home is Not a Debit Card
A lot of people thought it would never stop in the early 2000s, when home prices were going up so fast. They began financing new cars, boats, and vacations with the equity in their houses. So when the prices dropped, many of these homeowners ended up underwater (owing more than the value of their home) causing some to leave their homes. This increased the number of foreclosures.
And now, homeowners are a little nervous as they’re reminded of that crash as prices have now been skyrocketing again. On study shows that on average, homeowners’ equity has increased in the last year by a whopping $55,300! In one year!
Homeowners have learned their lesson. In another study shows that 41.9% of all homes with a mortgage today have at least 50% equity. That’s a LOT different than the squirrels 2000s.
What’s It All Mean, Lloyd?
The housing crisis of the early 2000s was caused by a crush of foreclosures. The risk of widespread foreclosures having an impact on today’s market isn’t going to happen due to the tight mortgage requirements and historically high levels of homeowner equity.
So breath. And call me. Values aren’t going to tank. You can buy a home now.