Housing Collapse in 2022?

It is hard to point to the single catalyst for the global collapse that led to the Great Recession.  Unemployment slowly creeped up which caused homeowners to stop making payments on their mortgages. 

When homeowners stopped paying mortgages, banks stopped receiving payments.  From there, banks couldn't loan out money to business to expand and hire employees who could pay mortgages; giving money back to banks.  It was a giant circle of dominos falling on itself.

One thing homeowners and investors remember was the rapid gain in house prices and then a pause just before the collapse.  For the last couple of years, there has been a rapid gain in the price of housing and now, we are experiencing a pause.  It feels as though we are reliving the stages of the Great Recession.

Luckily though, things are different this time around. 

Here are the three reasons why we should not experience the same type of collapse in 2008 this time around.

1. Mortgages are Different

Prior to the housing collapse in 2008, we believed that everyone should be a homeowner.  As such, the policies for issuing mortgages were rather loose.  There was a time where you could just tell a bank how much money you made, and they would just take your word.

I am sure you can see the risk in what was going on.  As a result, many people were obtaining mortgages for homes that they lacked the ability to repay.  To add to the problem, certain loan types were available at the time which were high risk and did not allow for the homeowner to accumulate equity in the home.

Since the crash and burn of the housing market, the rules surrounding mortgages have changed a lot.  Banks must do more checks to validate the borrower is able to repay the loan.  As such, there is now far less risk of foreclosure because the quality of the borrower is now better.

Also, the high-risk loans are no longer around and buyers are not going to buy a home that is too expensive for them to repay.

2. Equity is Built up in the Homes

As you have noticed, the prices of housing has skyrocket in the last couple of years.  I mean, that is the reason for the blog post after all.

So how does this prevent us from having a bubble pop?

Now, remember how those high-risk loans are no longer a thing?  Well, it has allowed homeowners to accumulate equity within their homes.  If a homeowner was to find themselves in some sort of hardship and unable to pay their mortgage, they now have the option to sell their home.

The built-up equity within homes means that homeowners could sell their home to not only avoid the foreclosure, but to also have extra money at the closing table. 

The high-risk loans we were experienced prior to the Great Recession denied homeowners this opportunity.  As a result, they were left listing their homes as short sales and hoping an offer would get accepted prior to their own foreclosure. 

3. No Supply, Huge Demand

Believe it or not, here in Hardin and Meade Counties, we have a housing crisis.  In my monthly housing analysis, I discussed how many homes were sold and how many were listed last month. As you can see there is not a lot of activity on either side. 

So why does this matter to our bubble problem?

Well, in the north, we have Nucor building a huge factory, and in the south, we have Ford about to build their factory.  These two companies have a market capitalization of about $100 Billion dollars.  That was a B not an M if you read that wrong. 

So, two giant companies have decided to invest in our community and bring tens of thousands of high paying jobs to our area. 

But, where are they going to live?

Where are they going to go to get groceries, buy gas, send their kids to school, etc?  These investments will cause secondary growth which will bring other high quality employment. 

But, where are they going to live?

To recap our supply and demand problem, we are going to be creating a lot of high paying jobs which will cause people to move to the area, but we have no place for them to live.

In the economic rule of supply and demand, what do you think will happen in our area in regard to the housing prices as these factories approach their opening day?  Are the employees going to wait for a house to be built, or use their high income to outbid current residents as existing homes go on the market?

So, What Should You Do?

For those of you who are planning on becoming real estate investors, or acquiring more properties in your portfolio, now is probably the time to do so.

As the time gets closer for these factories to open and the workers arrive, I believe the market will see prices continue to rise and days on market fall.  Therefore, even though prices are higher today than yesterday, it is still the "buy low" when we compare it to where the market should be headed tomorrow.

If you are a renter who is thinking about becoming a homeowner, now should be the time you will want to make that switch.  I won't reiterate how house prices should go up, but I will point out that rent rates should go up as well.  When you buy a home with a fixed rate mortgage, the cost of your mortgage does not change. 

I am not a talking head trying to get your attention, I put my money where my mouth is.  Just this year I moved into a house I purchased, and this afternoon I drove through a couple of neighborhoods looking at potential investment opportunities.

Everyone's real estate needs are different.  So that I may best serve you and your unique situation, please call so that we can develop a plan that matches your goals.