With the recent rise in home prices combined with the insatiable buyer demand, it is not uncommon for clients to ask: “Is a housing collapse possible in 2021?” Of course, with surging prices, tight inventories, & a backlog of new home construction, you can see why this question has come up. The short answer is that this not likely at all.
The Great Recession of 15 years ago was sparked by a devastating housing collapse that was fueled by low interest rates, loose mortgage-lending standards and the nation’s unquenchable thirst for home ownership. When the housing bubble burst, roughly nine million families lost their homes to foreclosure or short sale between 2006 and 2014. This also caused housing prices to nosedive 30% or more in many places, resulting in a collective loss of approximately $7 trillion for homeowners.
With this said, a repeat of what we witnessed 15 years ago is not very likely. We discuss several reasons why below.
Factors in today’s market
- More stringent lending standards: It is no secret that loose mortgage lending practices ultimately brought down some of the nation’s largest banks and mortgage companies during the housing collapse of 15 years ago. The standards for obtaining a mortgage today have changed dramatically. Buyers now undergo stricter income, credit and asset checks, making the process much more stringent. In fact, an entirely new regulatory agency, the Consumer Financial Protection Bureau, was created to enforce this new regulatory framework.
- Mortgage forbearance due to the pandemic: The recent pandemic-induced unemployment has been minimized in large part due to forbearance programs that have allowed homeowners to postpone their monthly mortgage payments without suffering penalties. As of early March 2021, 2.6 million homeowners’ mortgages were in such forbearance plans.
- The home equity cushion: Equity is the difference between the current market value of your home and the amount you owe on it. Simply put, higher levels of home equity help cushion homeowners from default in the event that home values drop. In the third quarter of 2020, the average family with a mortgage had $194,000 in home equity, and the average homeowner gained approximately $26,300 in equity over the course of the year.
- Price growth should slow down: Following the COVID-19 outbreak, real estate sales boomed. Needless to say, this has surprised many economists and real estate professionals. Sparked by record-low mortgage rates, many Americans opted to look for more space as social distancing became commonplace. This has led to dramatic price increases over the past year, but the current rate is unsustainable according to most real estate economists. The expectation is that prices will continue to appreciate at a much more sustainable pace.
While nobody knows what the future will hold for real estate prices, many believe that a market dip is likely. Of course, this will differ based on what part of the country you are in. An overall housing collapse is not being predicted by real estate economists. Once again, the fundamentals in today’s market differ greatly from what we saw 15 years ago.
With regards to the South Florida market specifically, we expect to see a steady demand from buyers relocating to the state. As we have stated in prior articles, the boom in remote working capabilities is likely the biggest catalyst driving this strong demand. Years ago, many Americans had to wait until they reached retirement age in order to buy their slice of paradise in South Florida. Now, more working Americans are calling South Florida their home.
Are you thinking about moving to South Florida? We can help. As South Florida natives, nobody knows this market better. Contact Live South Florida Realty, Inc. today!