How Has The Housing Market Changed Since the Crash?

house on chart showing decrease in statistics

It has been 10 years since the housing market crash and financial downturn of 2008. A lot has changed since then, fortunately for the better. In today’s post we will explore the changes and help shed some light on a few misconceptions regarding the market’s current state.

What the Market was Like Before Great Recession

If you were trying to buy a home in the several years before 2007-2008, you would have faced a very different environment than what we have today. The housing market was experiencing a boom. Inventory was high and home values were rising. Mortgage lenders were doing incredible business, and many people who sought financing were able to secure it fairly easily. Unfortunately, overly liberal lending and some unethical practices by unscrupulous lenders put many of these homeowners, as well as the overall economy, at risk.

“If you were house hunting before the crash, you could choose between an array of loan products to keep your payments low such as an interest-only loan, a “choose-your-own-payment” loan, a balloon payment loan or an adjustable-rate mortgage (ARM) with an extremely high cap,” wrote Michele Lerner of The Washington Post. “If your credit score was low, you didn’t have money for a down payment or your income was erratic, you could get around all those obstacles with a no-documentation loan, sometimes for as much as 125 percent of the home value.”

While there was nothing illegal about offering those products (in fact, some lenders still do), they often went to borrowers who were less-than-ideal candidates for those types of loans due to less restrictive regulations. Once home values began to drop and the housing bubble burst, many homeowners were stuck with mortgages they could not afford. For example, many homeowners with ARMs found it difficult to refinance or sell for a profit once their introductory rate expired. Millions of homeowners were left with negative equity (owing more on a mortgage than the home is worth) and foreclosures began flooding the market.

“Now that a decade has passed, industry insiders look back at where we were, what we learned and where we go from here to ensure that the trauma of the housing boom-and-bust and the Great Recession are not repeated,” Lerner continued.

What Has Changed?

Those pre-crash loans that weren’t a good fit for most borrower have almost disappeared. They’re still available through some lending institutions; however the regulations have tightened quite a bit, greatly reducing the chance of unqualified borrowers having access to them. Now, the most common choices for financing include fixed rate mortgages and ARMs that meet “Qualified Mortgage” (QM) standards established by the Consumer Financial Protection Bureau (CFPB). These standards act as safety features, in a way, to help protect the borrower from taking on more debt than they can adequately handle.

Rate Caps on ARM Loans

Today’s ARMs now come with caps so the interest rate can’t increase beyond a certain point once the introductory rate expires. In addition, borrowers’ mortgage application approval will be based off the worst-case scenario of the highest-possible mortgage rate.

More Documentation

Borrowers now have to provide more documentation for most loans, as well as make a down payment of at least 3.5%, depending on the type of mortgage. There are some government mortgage options that do not require a down payment, such as VA loans and USDA loans, but these programs have other strict eligibility requirements.

Higher Credit Scores

In today’s mortgage environment, borrowers typically must have a credit score of 760 or higher in order to qualify for the best interest rate. If a borrower’s score is below 620, it may not be possible to qualify for a loan at all.

More Transparency

Before the crash, buyers received a Good Faith Estimate (GFE) which was essentially an estimate of their loan costs. They also received a Truth-in-Lending statement and a HUD-1 statement that laid out the financial terms of their home purchase. Unfortunately, many buyers found these statements difficult to comprehend and accepted them without fully understanding their loan terms.

After the crash, the “Know Before You Owe” regulations put forward by the CFPB help provide greater transparency on the overall mortgage and home buying process. Now, buyers receive a three-page Loan Estimate that clearly explains whether they will owe a balloon payment at the end of the mortgage term, or if they will face any possible mortgage rate increase. In addition, buyers receive a Closing Disclosure that combines the former documents into a more user-friendly version.

What Hasn’t Changed?

According to Lerner, one fact remains unchanged, even after all the ups and downs.

“Despite the homeowners’ loss of $16 trillion in net worth and the 10 million people who lost their homes to foreclosure during the crash, one reality — though diminished — hasn’t changed: The majority of Americans want to own a home,” she writes.

“There’s a remarkably high preference for homeownership that shows up in every survey of renters,” says Chris Herbert, managing director of the Joint Center for Housing Studies of Harvard University. “Ninety percent or so of renters still want to become homeowners.”

Has the Housing Market Recovered?

Generally speaking, the market has recovered, although room for improvement remains. Prices across the nation, which dropped 33 percent during the recession, are now up more than 50 percent since hitting the bottom. This information comes from CoreLogic, a global property analytics site. A few markets have yet to regain their pre-recession levels. These markets can be found mostly in Arizona, Florida, Illinois and Nevada — all states that suffered greatly during the recession.

However, even though prices are on the rise, it’s not necessarily for the right reasons. Some say stricter lending practices have overcorrected the problem that led to the recession, making it too difficult for qualified borrowers to get mortgages.

Jonathan Miller, CEO of Miller Samuel, a real estate appraisal and consulting firm, was recently quoted in a Curbed.com article covering the changes since the crash:

“We’re really in a hangover phase. Just because prices are rising doesn’t mean we’ve recovered. [The market] is still distorted, and that’s because of credit conditions,” he told Jeff Andrews, contributor to Curbed.

 

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