5 Reasons Why Today's Northern VA Real Estate Market is Not Like 2007

Another volatile day in the stock market driven by the uncertainty of the Coronavirus (COVID-19) and the prospect of being locked down at home for weeks. Some home owners and homebuyers may be concerned we are headed for another housing crash like 2006-2008. Considering all the uncertainty this feeling is understandable. Ali Wolf the Director of Economic Research at the real estate consulting firm Meyers Research, addressed this point in a recent interview:

“With people having PTSD from the last time, they’re still afraid of buying at the wrong time.”

The volatile stock market may seem similar but the current real estate market is nothing like 2007. Here are 5 reasons why today’s Northern VA Real Estate Market is not like 2007.

1. Mortgage standards are tighter

During the housing bubble from 2003-2007, it was difficult NOT to get a mortgage. A barrow could simply state how much income they earned, and lenders would lend money based on this “stated income” with no documentation as proof. Not these days, at it is much tougher to qualify. The Mortgage Bankers’ Association releases a Mortgage Credit Availability Index which is “a summary measure which indicates the availability of mortgage credit at a point in time.” The higher the index, the easier it is to get a mortgage. As you can see in the graph below, during the housing bubble, the index skyrocketed. Today the index shows how difficult it is to qualify for a mortgage then it was before the bubble.

2. Prices are not out of control.

Here is a great visual to show how annual house appreciation in Norther VA over the past six years, compared to the six years leading up to the height of the housing bubble. This appreciation has remained strong recently, but it is nowhere near the rise in prices that preceded the crash

There’s a stark difference between these two periods of time. Yes, the current appreciation is higher than the historic average os 3.6%, it’s certainly not accelerating beyond control as it did in the early 2000s.

3. The historic low inventory continues.

The supply of available listing inventory needed to sustain a normal real estate market in Northern VA is approximately six months. Anything more than that is too many available listings and will causes prices to depreciate creating a buyers market. Anything less than that is an Inventory shortage and will lead to continued appreciation called a sellers market. Check out the graph below showing the number of listings on the market in 2007, before the bubble popped. Today, there remains a shortage, just ask any of my Northern VA home buyers over the last 3 months.

4. Houses became too expensive to buy.

The real estate formula to determine affordability has three components: the price of the home, the income earned by the home buyer, and the mortgage interest rate. Fourteen years ago the average income was low, prices were high, and yes you got it, mortgage rates were over 6%.

I will admit today prices are still high in Northern VA, but income has increased and the mortgage rate is about 3%. That is an absolute crazy interest rate. The good news is, this means the average person/family pays less of their monthly income toward their mortgage payment than they did back then.

5. People have home equity, not tapped out.

In the few years running-up to the housing bubble burst in 2007, many homeowners in Northern VA were using their homes as a personal cash machine. Many withdrew equity to purchase cars, expensive trips, or speculate in real estate investing. That is not happening now, and homeowners have much more equity.

Prices have risen nicely, leading to over half of homes in the country holding greater than 50% equity. Here is a table comparing the equity withdrawal over the last three years compared to 2005, 2006, and 2007. Homeowners have cashed out over $500 billion dollars less:

During the crash, home values began to fall, and sellers found themselves in a negative equity situation (where the amount of the mortgage they owned was greater than the value of their home). Some decided to walk away from their homes, and that led to a rash of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of other homes in the area. That can’t happen today.

Bottom Line

If you’re concerned we’re heading into a housing crash, take a look at the charts and graphs above to help alleviate your fears. There is no doubt we are in a tumultuous time in history, but we will improvise, adapt, overcome, and this too will pass.