Every fall, when the housing market begins the annual slowdown, buyers and sellers begin to ask if we are destined for another crash like the country experienced in 2007.
The housing market crash 15 years ago was responsible for a worldwide recession. Millions of families lost their homes and housing values plummeted more than 30%. It took nearly a decade for the Lansing market to fully recover from that disaster. While it’s true that the real estate market is experiencing surging prices and a housing shortage much like market environment prior to 2007, the conditions are different than those 15 years ago.
Uncontrolled Mortgage Financing.
Following a period of high interest rates approaching 18%, mortgage money became available for a new low of 7%. The market quickly became flooded with new buyers hoping to qualify for a mortgage loan. However, there was no agency regulating the business of mortgage financing. It was easy for just about anyone to set themselves up as a mortgage broker and make a fortune offering loans to unsuspecting buyers who didn’t know they were not financially capable of sustaining monthly mortgage payments.
“If they have a pulse, we’ll give them a loan.”
This was the joke in the mortgage business. It was possible for a buyer to secure mortgage financing for much as $750,000 on “stated income” without proof of employment. Millions purchased their home with no out-of-pocket expense. Adjustable-rate loans, with closing costs and down payment built into the monthly payment, made it easy for anyone to obtain a mortgage and become a homeowner.
These buyers often had a first and second mortgage and no equity in the home. Initially, the monthly payment was lower than renting, so it seemed like a good idea. However, the adjustable-rate eventually raised the monthly payment to more than many could afford.
Mortgage defaults rapidly increased nationwide with the investors who held those loans unable to sustain the financial loss. Ultimately, some of this country’s largest banks and mortgage companies went out of business.
Mortgage Practices have Changed.
These near fraudulent practices forced the United States Congress and federal regulators to change how mortgage lending is regulated. The Consumer Financial Protection Bureau was created to enforce standardized mortgage practice so that the process of obtaining a mortgage is more transparent. Lenders who do not follow prescribed practices will loose their license and suffer huge penalties.
Many economists are confident that there will eventually be a change in the market. Population movement, interest rates, and consumer confidence all contribute to a shift from “seller’s market” to “buyer’s market”…but not a crash.