This isn't a Housing Bubble

With the prices of homes on the rise, some are worried we’re experiencing a housing bubble like the one in 2006. However, market data says otherwise for three major reasons. 

 Firstly, in 2006, nearly anyone could qualify for a loan. The Mortgage Credit Availability Index (MCAI) from the Mortgage Bankers Association is an indicator of the availability of mortgage money. The higher the number, the easier it is to obtain a mortgage. From 2004 (378) to 2006 (869) the MCAI more than doubled. Compared to today, the number stands at a solid 130. The volume of mortgages with less than a 620 FICO score went from $376B (2006) to $74B (2020), this massive gap in the number of mortgages pulled contributes to one of the stabilizing factors that decreased the number of high-risk loans and led to a more stable market. 

 Secondly, during the housing bubble, homeowners were refinancing their homes and pulling out large amounts of cash. As the bubble began to burst, and prices began to fall, this led many homeowners to spiral into a negative equity situation (their mortgage was higher than the value of the house). Contrast that with today, where homeowners are letting their equity build. In 2006, the combined loan-to-value ratio was $4.6 billion. Today, the number stands at just over $8 billion, almost half of the cash-out refinances that homeowners took out in 2006.

 Finally, this time around, the housing market is a matter of supply and demand. The infamous FOMO effect (Fear Of Missing Out) was in full swing leading up to the 2006 housing bubble. This, combined with the upkeep of homeowners putting their houses on the market drove up buyer demand. In 2006 there were seven months of existing housing inventory, compared to today, that number is barely two months. Bill McBride, the author of the prestigious Calculated Risk blog, predicted the 2006 bubble. This is what he had to say about the state of the housing market today, “All of the fundamentals are there. Demand will be high for a while because Millennials need houses. Prices will keep rising for a while because inventory is so low.” 

 In conclusion, this market is nothing like the run up to the crash in 2006, supply and demand are driving the prices higher and more homeowners are choosing to hold off on pulling out a mortgage on their house, thus turning today's market into a classic model of supply and demand.

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