Fear. Worry. Uncertainty. These words describe how many people feel about today’s housing market. Home values surged higher since 2022, and within the past couple of weeks, mortgage rates have climbed to heights not seen in 23 years. With home affordability at record lows, many argue that when the economy cools or slips into a recession, housing will collapse, and foreclosures will rise. After all, isn’t that how the Great Recession unfolded?
The general public often jumps to conclusions without looking at all the facts and trend lines. They remember the burn from 2008 through 2011. Everybody was burned or knew someone hurt by the collapse in home values. The economy ground to a halt, and unemployment grew to levels last seen at the beginning of the 1980s. Thus, everyone is jumping to the worst-case scenario in their collective minds: housing must suffer.
It is imperative to immediately point out that just because mortgage rates have climbed towards 8% does not mean that values must go down, and many homeowners will lose their homes due to foreclosures or short sales. The Great Recession was fueled by a credit bubble inflated by loose lending standards, including subprime mortgages, pick-a-payment plans, teaser adjustable rates, zero down, and plenty of fraud. These high risk borrowers were susceptible to any adjustments in their rates or changes to the economy. Thus, a wave of foreclosures ensued.
Today, only 32 foreclosures and 16 short sales are available to purchase in Los Angeles County; that is only 48 total distressed listings. Distress demand, the number of new pending sales over the prior month, is at 29. Foreclosures and short sales represent only 0.6% of the active listing inventory and 0.9% of overall demand. Compare that to April 2012, right after the end of the Great Recession, when there were 5,370 distressed listings, 33% of the inventory, and distressed demand was at 4,192 pending's, 51% of total demand.
That is correct. Over half of the demand was distressed and this was after the financial crisis. Lenders were in control of the housing market through bank-owned listings, foreclosures, and short sales, where the lender (or lenders) needed to approve taking less than the outstanding loan balance. They were unemotional sellers willing to do whatever it took to sell. Often, that meant pricing a home below the most recent closed sale. Consequently, home values plummeted.
Some believe right now is the calm before the storm, similar to 2005 through 2006. Yet, this is where today’s catastrophically low inventory and the strength of the homeowner step in and squash this argument. The leadup to the Great Recession was characterized by a national inventory that grew from 2.15 million homes in January 2005 to nearly 4 million in the summer of 2006, a glut of homes for sale. This year, the inventory climbed to 1.3 million homes and will drop to less than 1 million, nearly a record low.
Before the Great Recession, the average buyer FICO score was 681 (2006), low or no-downpayment loans were common, and buyers tapped into subprime mortgages, pick-apayment plans, and teaser adjustable-rate products. Adjustable-rate mortgages made up over a third of mortgage applications each year from 2004 to 2007. There was a flood of cash-out refinances where homeowners used their homes like ATMs. When the economy slipped into a recession and adjustable-rate mortgages reset to much higher rates, a wave of homeowners could no longer afford to make their monthly payments. Increasing unemployment surged from 5% in January 2008 to 10% in 2009, exacerbating an already stressed housing stock.
Today’s housing stock is entirely different. Lending has been tight ever since the adoption of the Dodd-Frank Act of 2010, a law that provided common-sense protections for consumers in obtaining a loan. Buyers have purchased homes with higher down payments, tight qualification and lending standards, and an average FICO score of 746 (2022). Cashout refinances are at their lowest levels since 2000. Unemployment has remained at decade lows, below 4%. An incredible 96% of homeowners with a loan enjoy low fixed-rate mortgages. Unlike before and during the Great Recession, homeowners today are not vulnerable to rising payments. Nearly 50% of all homeowners across the county are considered “equity rich,” meaning they have more than 50% equity in their homes.
Homeowners do not have to move. They have qualified for years with solid credit and good jobs and are now enjoying their low, fixed payments. Consequently, homeowners continue to “hunker down” in their homes, unwilling to move due to their current underlying, lockedin, low rate. According to the Federal Housing Finance Agency’s National Mortgage Database, 85% of Californians with a mortgage have a rate of 5% or lower, 69% is 4% or lower, and 30% is 3% or lower. As a result, fewer homeowners are listing their homes for sale in the current high-rate environment. From January through September, 47,760 new sellers entered the market in Los Angeles County, 13,760 fewer than the 3-year average before COVID (2017 to 2019), 36% less. These missing signs exacerbate the low inventory dilemma and have led to a waterfall dive in the number of closed sales.
The bottom line: do not count on a wave of distressed homes or a housing crash. The Los
Angeles County Expected Market Time (the number of days to sell all listings at the current
buying pace) is at 75 days, lower than last year’s 85-day level and a bit better than the 3-
year average prior to COVID at 79 days. Even if the market were to line up slightly favoring
buyers in the negotiating process, the inventory crisis and strong housing stock would
prevent a substantial downturn.
