Will the housing market collapse in 2022? (Podcast)

No, the market will not collapse in 2022

The real estate market has been hot for the last year or so, prices skyrocketed, inventories bottomed out, and buyer demand soared. But how hot is too hot?

This is a fair question – especially for those who witnessed the apartment crash just over a decade ago.

Fortunately, the conditions are very different from 2008. And as mortgage advisor Arjun Dhingra recently put it in an episode of The Mortgage Reports podcast, "You can feel more secure in today's market."

Here are just a few examples of how the current housing market is more stable than it has been in years past.

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5 reasons why the housing market won't collapse in 2022

According to Arjun Dhingra, a mortgage expert with more than 20 years of experience, there are 5 main reasons we are not headed for a property crash in 2022:

Tighter lending standards, low risk mortgages are the norm. Owners have a lot of equity. The job market is strong. Homeowners in trouble have more options

Let's look a little deeper at each of these factors.

1. The lending standards are stricter

One of the big problems during the last real estate crash was the loose lending practice.

Mortgage lenders were not very strict about who they would give money to, and they often lent too much to those who could not easily afford it.

Getting a loan is not that easy these days. There are higher minimum credit scores, more regulatory safeguards, and lenders are generally better able to assess a borrower's solvency.

"Borrowers applying for mortgages are really going through a pretty tough process now," Dhingra said on the podcast.

“They are asked for a lot more paperwork and they really look after you to make sure you qualify for the loan and are a responsible borrower who will be able to pay back the loan for as long as you want have it. "

As a result, existing homeowners can afford their loans better and are less likely to default than in years past.

2. More stable credit products are the norm

With that in mind, lenders are also focusing on more stable, lower-risk credit products.

Many borrowers used to get adjustable rate mortgages, which can be quite dangerous in the wrong hands.

Today, 30 year fixed rate loans are the norm – a much more manageable product for most consumers' budgets.

"Fixed-rate mortgages have enjoyed widespread popularity for thirty years," said Dhingra. "Banks and investors have rated these loans more attractive because they want to entice people into taking a long-term, fixed product that has no fluctuations, no movements and much more payment security."

In July 2021, floating rate loans made up only 1% of all mortgage lending. The 30-year fixed loan, on the other hand, made up a whopping 75%.

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3. Homeowners have a lot more equity in their homes

"Perhaps the most powerful difference is that borrowers are sitting on more equity than ever before – and definitely compared to 10 years ago," said Dhingra.

Equity is vital in an economic downturn. If you have a large equity stake in a property, a drop in price doesn't hurt that much. In many cases, if you decided to sell, you would still make a profit.

In 2008, however, most homeowners had very little equity.

Since they were allowed to buy houses at very low cost, their equity ratio was low. When their homes fell in value, they turned their mortgages upside down and owed more on the home than it was worth. This resulted in a wave of foreclosures, short sales, and other quick sales.

Today's buyers have to make larger down payments, which immediately leads to higher equity ratios.

Add to this the steady appreciation of homes over the past decade, and most borrowers sit on solid equity should things turn sour.

4. Job losses are not comparable

The rampant job cuts in the financial sector played a major role in the 2008 crash.

"The vast majority of them owned houses, and some of them owned multiple houses," said Dhingra. "So when they lost their jobs and had little money for these houses from the start, you saw a flood of houses coming onto the market."

This spate of foreclosures, short sales, and inventory drove house prices down, and many homes were sold for less than they bought.

Fortunately, it's very different this time.

There were certainly large job losses during the pandemic, but most of them came from the service industry – a sector made up mostly of tenants.

For these reasons: "You didn't see this flood of stocks suddenly hit the market," said Dhingra. "Many of these tenants either went and rented elsewhere, consolidated households, or did what they had to do to survive."

5. There are widespread forbearance options

These days homeowners find it much easier to get back on their feet. When the pandemic broke out, the government acted quickly and put in place a national forbearance program that allows most borrowers to pause their mortgage payments – sometimes for up to 18 months.

Not only does this give them a financial break when money is tight, but it also allows many to save money while waiting for the economy to recover or for their jobs to return. As Dhingra put it, "Many of them have stored cash without having to make payments."

The bottom line

If you are concerned about a potential mortgage crash, you are not alone. Fortunately, the conditions are simply not there this time. Do you have additional questions or concerns about the market? Talk to an experienced mortgage professional. They can help you talk about it.

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