Home prices have returned to boom levels similar to 10-years ago when the housing bubble burst and catapulted the Great Recession. Despite similarities between then vs. now, the current market is experiencing material differences, according to data released Monday from Realtor.com.
Historically low inventory levels, tighter lending standards, significant job and household growth, and a strong housing market backed by economic fundamentals are allegedly keeping the U.S. from another bubble burst.
The biggest difference between the past and present are updated lending standards. With reforms like Dodd-Frank and the Consumer Protection Act requiring loan originators to show verified documentation that a borrower is able to repay a loan, lending standards are the tightest they have been in 20 years, the report noted.
"Lending standards are critical to the health of the market," said Danielle Hale, Chief Economist for Realtor.com. "Unlike today, the boom's under-regulated lending environment allowed borrowing beyond repayable amounts and atypical mortgage products, which pushed up home prices without the backing of income and equity."
With the revised lending standards, the median 2017 home loan FICO score was 734, an increase from 700 in 2006, on a scale of 330 to 830.2.
Additionally, tight lending standards have kept home flipping and over-building in check by limiting borrowing power. However, this has contributed to constrained construction levels.
In 2006, there were 1.4 single-family housing starts for every household formed, which doesn’t represent a healthy market. Currently, the market is below normal construction levels at 0.7 single-family household starts per household formation, according to the data.
However, economic fundamentals, such as strong employment and demand paired with low inventory is driving prices higher in the current market. However according to Hale, it is important to remember rising home prices didn’t cause the housing crash.
"It was rising prices stoked by subprime and low documentation mortgages, as well as people looking for short term gains—versus today's truer market vitality—that created the environment for the crash," said Hale.
In the present market, Hale added, "The healthy economy is creating more jobs and households, but not giving these people enough places to live. Rapid price increases will not last forever. We expect a gradual tapering as buyers are priced out of the market—not a market correction, but an easing of demand and price growth as renting or adding roommates becomes a more affordable alternative."
When it comes to job growth, in October 2017, the unemployment rate was at 4.1 percent—representing a 17-year low, with more than 150,000 jobs created on average each month.
Millennial job growth has also added to the rising demand, the report noted, as 52 percent of reported home shoppers were millennials. And while this generation continues to age, the demand for homes is expected to increase.
In addition to the growing demand, low inventory is causing an impact. The market is currently averaging 4.2 months supply. Vacancies are very tight with for-sale vacancies dropping to 1.3 million in 2016, compared to 1.9 million in 2006.