Financial Poise

Housing Market Data is Not as Rosy as Some Think

While the debate about whether or not we’re in a recession rages on in wars of words over emerging data, there is a specific sliver of the conversation that seems to rile people up more than others, and that’s the housing market.

It’s understandable that people would look at housing for clues, as the market has historically been a leading indicator of times to come. The problem is that memories tend to be short, which in this case means that folks are trying to compare what’s happening now with what happened last time the market was in serious trouble: 2008.

As CNBC real estate correspondent Diana Olick opined:

All of this has people asking: Is today’s housing market in the same predicament that it was over a decade ago, when the 2007-08 crash caused the Great Recession?

The short answer is: no. America’s housing market is in far better health today. That’s thanks, in part, to new lending regulations that resulted from that meltdown. Those rules put today’s borrowers on far firmer footing.

For the 53.5 million first lien home mortgages in America today, the average borrower FICO credit score is a record high 751. It was 699 in 2010, two years after the financial sector’s meltdown. Lenders have been much more strict about lending, much of that reflected in credit quality.

All of that is true. It also aligns with what many housing bulls have been saying all year, even as concerns about affordability literally pushed Americans to become ex-pats. The problem is that this is a pretty narrow way to look at the housing market for multiple reasons.

For starters, the idea that mortgages today are “safer” is only partly true. Things are starting to tilt back towards mortgages that carry more risk. Business Insider reports:

A growing number of borrowers are turning to a type of mortgage that helped cause the 2008 housing crash as interest rates rise and affordability sinks.

Data from mortgage marketplace LendingTree shows the number of adjustable-rate mortgages offered to its users increased by 230% from the first half of 2021 to the first half of this year.

Also known as ARMs, these loans have an interest rate that adjusts over time depending on the fluctuation of market rates. They’re less predictable than fixed-mortgages as they tend to change periodically, but are attractive to borrowers as they initially have lower interest rate payments.

With more borrowers struggling to afford homeownership, it’s no surprise they are making a comeback.

ARMs are not inherently bad all of the time. If you’re planning on moving shortly or refinancing, it could be a prudent bet. They do, however, require more risk be shouldered by both the buyer and the lender. The surge in demand for such arrangements is not completely off the rails yet,  but there’s still enough to watch the market carefully.

Were risky home loans the driver in 2008? Absolutely. That had a lot to do with bank exposure and ratings agencies. And while the rise in popularity in ARMs might be concerning, it’s worth reminding ourselves that there are different ways for a market to get into trouble. Banks might not have the same kind of exposure, but just because blue chip stocks are in a healthier place does not mean that consumers are in a healthy place. That’s the second consideration in this equation. While overall delinquency rates are down, the number of people in severe delinquency – meaning people who are more than three months behind on mortgage – is up over 55% from pre-pandemic levels. 

National analysts point to the overall national delinquency rate being low as the counter to that figure, and they aren’t entirely wrong. The problem is that severe delinquency is what ends up putting people on the street. Pair these struggles with major food inflation, the Fed’s rate hikes, and that increased appetite for ARMs, and there’s a dynamic involved that shouldn’t be ignored.

There’s a reason the big banks are setting money aside in anticipation of a jump in delinquency.

All of this is also cause for homebuilder sentiment to be dropping, but it’s more than just that. It’s also tied up with much higher transportation and commodity prices. Fast Company explains:

The cost of building continues to soar. Across North America, construction costs are up between 5% and 11% from last year, according to a new quarterly report from the property and construction consultancy firm Rider Levett Bucknall. This continues a steady upward rise in costs seen every quarter for the past five years.

The impact of this trend is that it’s becoming increasingly expensive to build homes and office buildings. The rising costs may very well signal an oncoming recession, which will likely lead many developers to stall or even cancel big projects.

“Construction is historically a cyclical industry which responds to the general pace of the wider economy,” Julian Anderson, president of RLB North America, tells Fast Company via email. “When the economy is hot and there is a lot of investment, then construction is busy. When the economy is in recession, then the construction industry will slow.”

A rapid increase in costs, Anderson says, “typically portends the end of an up cycle.”

In other words, the housing market today is most certainly different from what we were dealing with in 2008. There are flavors that smack of some of that damage, but it’s important that we remember that different bubbles manifest differently. When you take a step back, the positive data does not overwhelm the negative. Complicated? Yes. Indicative of  trouble ahead? Time will tell, but signs point to yes.

Disclaimer: The above information should not be construed as investment or financial advice and was not compiled by a licensed professional. Individuals should seek professional guidance to clarify the information therein prior to acting on it. Past performance is not indicative of future results.

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):

Additional reading:

This article was written and edited by Lauren Nelson]

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