Before and After: 3 Ways the Economic Crisis has Transformed the Real Estate Market
Are you a homeowner who has spent the past few years waiting until prices rise enough to sell? Or someone who is trying to save enough money to buy your first home? Either way, you’re probably frustrated with the state of the housing market.
The fact is, the damage wrought by the housing crisis, and the actions taken to fix the system, may be creating a new “normal” for housing. Yet, that’s not necessarily such a bad thing if the changes in mortgage standards — as well as in housing supply and demand — create a market less prone to boom-and-bust cycles.
“There’s a natural cyclical relationship between housing and the overall economy, and I think we’ll return to that,” says Doug Duncan, senior vice president and chief economist at Fannie Mae. “The fluctuations won’t be nearly as large as they were in this crisis, which was really unprecedented.”
While the pain inflicted by the crisis that first struck in the fall of 2007 has been well documented, there are some positive outcomes that could make the market fundamentally stronger in the long run. Here are a few:
Setting New Standards
There’s no question that buying a home has become more difficult since the crisis. Banks are more discerning, scrutinizing your financials more closely before deciding whether to offer a mortgage. In general, lenders’ more rigorous standards — compared to those in place before the crisis — have helped borrowers qualify for mortgages they can afford.
Yet, along with tighter standards comes a new level of transparency, providing you with a clearer idea what obligations you face when taking out a mortgage. The Consumer Financial Protection Bureau or CFPB, was set up in the wake of the housing crisis to help borrowers get information when making their buying decision.
“While they will make the process more rigorous in some sense, they provide more clarity to consumers about the conditions needed to acquire credit,” says Duncan. “If consumers have better information, they make better decisions.”
Dodd-Frank Act requirements that went into effect this year codify sound underwriting principles, requiring that lenders only make loans after confirming the borrower’s ability to repay the loan, based on detailed documentation of financial history and capacity. Some nonprofits and other organizations that focus on lending to low-income homeowners aren’t covered by the new rules.
“The housing market will be better for the fact that lending will be more sustainable going forward,” says Duncan.
Buyers Who Qualify
The new lending standards mean you may have to save up a little longer before you start visiting open houses. In fact, many consumers are taking a more cautious approach to buying a home, with more would-be buyers holding off until they’re sure they can afford the cost of maintaining the home over the long term — not just the initial purchase.
“There is no longer a stigma associated with renting,” says Duncan. “So borrowers are not making a move toward homeownership until they are confident of their financial situation.”
A majority of younger renters say they plan to buy at some point in the future, according to a survey conducted last year by Fannie Mae. Yet, while they’re nearly twice as likely as older respondents to say they’re renting to save up for a home, they’ve also become more uncertain than in the past about their ability to afford one.
As noted earlier, there also appears to be less of a stigma around renting than before the downturn, when everyone seemed to be joining the ranks of homeownership. Now, renting seems to be increasingly viewed by many as a smart strategy while saving for a home.
The combination of the more judicious lender and the more prudent consumer is producing a stronger buyer — someone who’s better qualified to take out a mortgage and more able to afford the ongoing cost of a owning a home.
Today’s buyer tends to be older, have a higher income and higher credit score than before the onset of the turmoil. A quick comparison of the home buyer profiles compiled by the National Association of Realtors® before and after the crisis tells the story: the typical buyer in last year’s survey was 42 years old with a household income upwards of $83,000, compared with a
39-year-old bringing in $74,000 in 2007.
Leaving Booms and Busts Behind
Beyond the changing borrower profile, the makeup of the homebuying community is also shifting. Gone are many of the speculators who helped fuel the boom by flipping properties. In their place, a new class of investors — private equity firms such as Blackstone and Colony Capital as well as smaller investors — has stepped in and helped remove some of the excess supply by buying up distressed homes, renovating them and renting them out.
“As we overshot the homeownership rate, [these investors] have assisted in transitioning the properties that were distressed real estate into rental properties,” says Duncan. The country’s ownership rate has slipped below 65 percent for the first time in nearly 20 years.
As the supply of distressed properties returns to more normal levels, demand is being fueled by potential purchasers who are more committed to homeownership as a longer term lifestyle investment.
While that means you may have to be a bit more patient about buying or selling a home, it may also suggest a little less risk of the booms and busts of the past. “The changes in underwriting criteria and the adjustments in consumer and investor attitudes about residential real estate all will lead to a more stable, balanced market going forward,” says Duncan.