No (Subprime) Crisis: Why the Cooling Housing Market Is Different This Time

Not a 2007-08 Repeat

With the Federal Reserve raising rates in response to runaway inflation, the housing market is cooling, after being red-hot for months. While prices remain elevated, borrowing costs have increased, and that pushes down demand over time. But this potential housing market slowdown is different from the crash of 2007-2008 that led into the Great Recession.

While the economy is facing a series of headwinds at present and some forecast a recession in 2022, the housing market is much healthier than it was 15 years ago. In many ways the major housing meltdown we all experienced back then provoked changes that make things better at present. Lenders have embraced stricter underwriting practices, leading to fewer bad loans.

Why Things Are Different

Some of the numbers behind the housing market illustrate its relative health. The average borrower’s FICO credit score is 751, a record high. In 2010 it was 699, a full two years after the sector started melting down. That upward trend in credit quality reflects the more strict lending practices.

Another factor working in the current housing market’s favor is the absence of overleveraging. In 2011 around 25% of all borrowers had negative equity in their homes. Now only 2.5% have less than 10% equity.

That’s also translated to fewer mortgage delinquencies. This year, just 3% of all mortgages are past due, a record. Delinquencies did increase when COVID-19 first started spreading, but the overall number is now lower than before the pandemic.

The Debt Details

During a rising-rate environment, borrowers paying back ARMs or adjustable-rate mortgages are at risk of default because monthly payments increase. To that end, industry experts note the housing market contains fewer risky loans than it did in 2007. Back then there were less-strict regulations in place and 36% of all mortgages were ARMs. Today that number is down to around 8%.

After the loan is signed, ARMs remain fixed for five, seven, or ten years. Right now, around 1.4 million adjustable mortgages face reset and therefore higher rates, but in 2007 that number was 10 million. It’s true the housing market may be cooling, and prices could fall in spots. Still, things are looking much more solid than they did during the last downturn.

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