This Real Estate Market Is the Strongest of Our Lifetime

This Real Estate Market Is the Strongest of Our Lifetime

When analyzing the current data, one striking observation is the remarkable strength of the housing market. In fact, it is evident that this housing market stands as one of the most solid and resilient markets in recent memory, if not the strongest one we have witnessed in our lifetime. Let's delve into two key fundamentals that substantiate this assertion.

1. The Current Mortgage Rate on Existing Mortgages

First, let’s look at the current rate on existing mortgages. According to the Federal Housing Finance Agency (FHFA), as of the fourth quarter of last year, over 80% of existing mortgages have a rate below 5%. That’s significant. And, to take that one step further, over 50% of mortgages have a rate below 4% (see graph below):

Amidst media discussions about a potential foreclosure crisis or an increase in homeowners defaulting on their loans, it is crucial to consider the following perspective. Homeowners who currently enjoy favorable mortgage rates will likely exert considerable effort to maintain their mortgages and remain in their homes. This is because finding another house or renting an apartment at the same affordability level becomes challenging due to higher mortgage rates prevailing in the market. Even downsizing may not provide significant cost savings given today's higher mortgage rates.

This dynamic contributes to the solidity of the housing market's foundation. The large number of homeowners with low mortgage rates helps prevent a crisis similar to the flood of foreclosures experienced in 2008. Their ability to sustain their mortgage payments and retain their homes mitigates the risk of a widespread foreclosure scenario, thereby fostering a more stable housing market environment.

2. The Amount of Homeowner Equity

Another fundamental aspect that underscores the strength of the current housing market is the substantial equity held by American homeowners. Data from the Census and ATTOM reveals that approximately 68% of homeowners have achieved significant equity in their homes. This can be attributed to two factors: either they have fully paid off their mortgages or they possess at least 50% equity in their properties, as depicted in the chart below.

This high level of equity among homeowners serves as a powerful asset, providing financial stability and a sense of security. It also acts as a safeguard against potential market downturns, as homeowners with substantial equity are less likely to default on their mortgages. This overall equity position contributes to the resilience and robustness of the housing market, further strengthening its foundation.

In the industry, the term used to describe homeowners with substantial equity is "equity rich." This distinction is noteworthy because it contrasts with the situation observed during the 2008 housing crash when some homeowners had to make the difficult choice of abandoning their homes due to owing more on their mortgages than their homes were worth.

However, the current scenario is different, primarily due to the significant equity accumulated by homeowners in recent years. This substantial equity acts as a protective buffer, as homeowners are less likely to face negative equity situations. Consequently, the housing market is spared from another wave of distressed properties flooding the market, similar to what occurred during the crash. This prevalence of equity-rich homeowners creates an exceptionally solid foundation for today's housing market, bolstering its overall strength and stability.

Bottom Line

The current housing market stands out as one of the most solid and resilient markets in recent memory. This distinction can be attributed to two key factors. Firstly, homeowners are highly motivated to preserve their current mortgage rates, as they have obtained favorable borrowing conditions. This determination to retain their low mortgage rates sets the current market apart from the circumstances seen in 2008.

Secondly, homeowners today possess a substantial amount of equity in their properties, which acts as a protective barrier against potential market downturns. This significant equity position contributes to the overall stability and strength of the housing market. These factors combined emphasize the fundamental differences between the current housing market and the market conditions experienced during the 2008 crisis.