The American Dream is still very much alive and well, and includes homeownership, especially here in Northern VA. National Association of Realtors (NAR) recent study finds that over 86% of home buyers across the country agree, homeownership is still their American Dream.

Before 1950s, less than half of the country achieved the dream of home ownership. However, after World War II, many returning veterans used the benefits afforded by the GI Bill to purchase a home.

Check out this Vintage advertising for West Vienna Woods in the early 1950’s. It mentions the GI Bill!

Since then, the number of homeowners throughout Northern Va and the entire country has increased to the current rate of 65.5%. The desire for homeownership has kept home values appreciating ever since. Check out the graph below tracking home price appreciation since the end of World War II:

I would like to point out the only time home values dropped significantly since WW II was the housing bust of 2006-2008. (The only other time, pre WW II was the great depression) If you look at how prices spiked prior to 2006, it looks similar to the current spike in prices over the past two years, right?

What Caused the 2006 Housing Crash?

For those selling real estate back then, like me, remember the foreclosures that flooded the market in Northern VA. The huge amount of listing inventory drove down home values dramatically. The two main reasons for this flood of foreclosures:

1. Many homebuyers were not qualified for the mortgage they obtained, which led to more homes turning into foreclosures. (Sub Prime Loans= Buyers who could not afford the mortgage payment)

2. Many other homeowners cashed in the equity on their homes to buy “other stuff”. Then, when home prices dropped, they found themselves in an underwater situation (where the home was worth less than the mortgage on the house). Many of these homeowners walked away from their homes, leading to more foreclosures and short sales. This cause all home values to lower.

This cycle continued for several years.

Today’s Real Estate Market Is Different

Here are three reasons today’s market is nothing like 2006.

1. Homeownership Demand Is Real (Not Artificially Generated)

The housing market leading up to 2006, banks were giving away loans and creating artificial demand by lowering lending standards and making it easy for just about anyone to qualify for a home loan or cash out refinance their current home. Today, however, is so much different. Those who are purchasing or refinancing a home face much higher standards from mortgage companies.

The Urban Institute shows the amount of risk banks were willing to take on then as compared to now.

There’s always risk when a bank loans money to anyone for any reason. However, leading up to the housing crash of 2006, mortgage lenders took on greater risks in both the person and the mortgage product offered. Low credit requirements and stated income loans the most egregious. This led to mass defaults, foreclosures, and falling prices.

Today, the demand for homeownership is real. It’s partially due to the re-evaluation of the importance of home due to a worldwide pandemic. Also, lending standards are much stricter in the current lending environment. Purchasers can afford the mortgage they’re taking on, so there’s little concern about possible defaults.

Don’t worried about the number of people in forbearance, you should know there’s no risk of that causing an upheaval in the housing market today. There is not flood of foreclosures coming.

2. Not Using Real Estate as ATMs

When home prices were increasing quickly in the early 2000s, many thought it would never end. Homeowners started to borrow against the equity in their homes to finance vacations, new cars, and boats. When prices started to fall, many of these homeowners were underwater, leading some to abandon their homes. This increased the number of foreclosures.

People young and old have not forget the lessons of the crash as prices skyrocketed over the last few years. Black Knight reports that tappable equity (the amount of equity available for homeowners to access before hitting a maximum 80% loan-to-value ratio, or LTV) has more than doubled compared to 2006 ($4.6 trillion to $9.9 trillion).

The Homeowner Equity Insights report from CoreLogic reveals that the average homeowner gained $55,300 in home equity over the past year alone. Odeta Kushi, Deputy Chief Economist at First American, reports:

“Homeowners in Q4 2021 had an average of $307,000 in equity – a historic high.”

ATTOM Data Services also reveals that 41.9% of all mortgaged homes have at least 50% equity. These homeowners will not face an underwater situation even if prices dip slightly. Today, homeowners are much more cautious.

3. Low Inventory

Once prices began to fall in 2006 , many home builders almost completely stoped building new homes and subdivisions even as population continued to grow. In 2009, the number of new home starts bottomed out at only 509,000 new construction for the entire year. This should average closer to 1.25 to 1.5 million new homes. The residential construction of new homes did not reach 1.2 million new home starts until 2018, a decade after the end of the housing bubble.

The 2021 new housing starts reached 1.6 million, which in no way catches up to a decade of so few new residential construction. This means millions of homes that should have been built that have not, causing continued low inventory of homes on the market.

Bottom Line

National home values have significantly only dropped twice in history, the great depression and 15 years ago. With much stricter mortgage standards and a historic level of homeowner equity, the fear of massive foreclosures impacting today’s market is not realistic. Low inventory will continue to hold values in the near future, with rising interest rates only slowing price appreciation.

Keep in mind real estate is local, and at times local prices may drop due to some small local event. Remember the collapse of the Pittsburg steel industry in the mid 80s!