A lot of people say that housing in the United States is too unaffordable, and that will result in a downturn. I have been a real estate broker and investor since the early 2000s and have been through the ups and downs of the housing market. I have also witnessed what I think caused the last bubble and crash and what I think is causing higher prices in our current market. I agree that housing in the United States is much less affordable than it was 5 to 10 years ago, but after the crash, housing was the most affordable it had ever been. When you look at the history of the US housing market and the affordability of housing around the world, it is not as bad as many people make it out to be. I don’t think we are in for another crash any time soon.
Did unaffordable housing cause the last market downturn?
I have written a few articles about the previous housing market crash. I was a real estate broker and investor before, during, and after the crash. I saw first-hand the crazy lending and building that was going on in my area in Colorado before the crash. I worked with my dad at the time, and I asked him why would banks lend 120% of the value of a house? Why are they giving out loans to people who have horrible credit? Why are they building so many houses when our population cannot support it? He could not answer those questions, and neither could I. We soon saw that these were not smart practices, and they contributed greatly to one of the worst housing market crashes ever.
The last housing market bubble was caused by loose lending guidelines. Almost anyone could get a loan. I experienced this when I bought my first house. I bought a house when I was 23 in 2002 for $190,000. I got a stated-income loan, which meant I did not have to prove how much money I made. It was easy: too easy. Since so many people could buy houses, new home builds took off like crazy. The builders could sell as many houses as they could build because everyone could buy a house! Lending guidelines were loose for the builders as well as it was very easy for them to get loans to build houses. People were getting adjustable rate loans, so they bought more-expensive houses than they could afford, and fraud was rampant. Eventually, it all imploded when people could not make their house payments and the banks realized they were lending to the wrong people. Buyer demand dropped, and there were thousands of new houses that could not be sold. The bubble was caused by a false demand brought on by loose lending guidelines and overbuilding.
What is making housing less affordable in the United States?
Housing prices have increased a lot since the downturn, and many people say that means we are in for another crash. High prices do not automatically mean a crash is coming. The reasons for this crash are much different from the last crash.
- There is much less building going on now than before the last crash, which means there are fewer houses for people to buy.
- People are scared to sell their houses because they do not think they can find another house to buy.
- The economy is doing very well in many parts of the country.
It is not a false demand pushing prices up but low inventory. Low inventory is a much different problem than a false demand. Low inventory can only be solved by building more houses, and that is not happening. Check out the graph below that shows new house starts since 1945:
This graph cuts off before we saw the latest round of building pick up some, so here is a graph that shows more recent data:
The current housing starts are right around 1,200,000 and have been stagnant the last few years. Building is still well below the peaks we have historically seen and even below the average for a normal market. New builds are at about the same pace as in 1945 when the population was 140 million. The population in the United States in 2018 is 326 million. This is after we had record low building for three years. There are not enough houses being built to meet market demand. Part of the reason they are not building enough houses is that it is tougher for builders to get loans.
Are loose lending guidelines causing housing prices to rise?
I also see news articles and social media posts about lending guidelines loosening up again and how we are headed for another mortgage meltdown because of it. I wrote an article a while back about the actual statistics on lending, and we are nowhere close to the craziness that was going on ten years ago. You can read the article below, which Dennis Cisterna contributed to with all the stats.
While many lenders are claiming they will loan to subprime borrowers, almost none of them actually are. Things have changed greatly since the crash. Before the crash, lenders were able to give anyone a loan and then sell that loan to Wall Street. Wall Street did not really know what they were doing or buying, so they kept buying every loan package. When the crash happened, Wall Street and many big banks got burned. They learned that they should not buy any loan that comes along. Wall Street has created an environment with much stricter lending guidelines because they do not want to get burned again. They will only buy loan packages that meet strict guidelines. It is much tougher for house buyers to get a loan on a house. Credit scores are much higher now; debt to income ratios are much lower now, and the stated income loan disappeared. Investors must put at least 20% down on almost every loan they get (they could put 5% or less down before the crash). Adjustable rate mortgages are still around, but they have much safer terms than they had before. No matter what you hear, lending guidelines are much tougher than they were before the crash.
How unaffordable are houses in the United States compared to other countries?
Another argument that I hear is that housing is too unaffordable in the United States, which will cause the market to crash. People are right when they say that housing in the United States is less affordable than it was a few years ago. 2015 was one of the most affordable times in the history of the United States to buy a house. http://www.businessinsider.com/us-homes-are-more-affordable-than-at-any-time-in-history-2012-5. Low-interest rates coupled with low housing prices and a decent economy made housing really cheap. Check out the graph below that compares housing affordability in the United States compared to other countries.
Prices in the United States are higher than they were, affordability is lower than it was, but we are still better off than many other countries. Canada and Australia have much worse affordability, but they did not have a crash like the United States did.
As you can see, housing prices in Canada and Australia saw a dip but not a crash. They have markets that are much less affordable than the United States. My point is that just because houses are unaffordable, it does not mean that we will see a market correction or crash. People figure out a way to cope with higher prices.
If you are interested in buying a house, I talk about everything you should know in my book: How to Buy a House: What Everyone Should Know Before They Buy or Sell a Home.
I am not saying there will not be a crash or a correction. I cannot predict the future, but what I am saying is that high prices and unaffordability do not guarantee a housing market crash. Other countries have been through these same things at much greater levels that the United States without a crash. The housing market is much different than it was before our last crash. I think the biggest contributors were overbuilding and loose lending guidelines. Both of those causes are not existent in today’s market.