The Home Equity Safety Net
With homes appreciating so quickly, is this bubble about to burst? Are we headed for a housing crash? Even as homes literally fly off the shelves, this question continues to be asked. Well, the fundamentals tell us no! Why? Because unlike 2008, this market has been propelled by home equity gains that provide a safety net for homeowners who may need to sell. 95 percent of all homes nationwide have a minimum of 10 percent equity. 87 percent of them have at least 20 percent equity and 37 percent are owned free and clear. Here in Colorado, only 2.5 percent of homes have less than 10 percent equity and only 1.3 percent of those are underwater. In addition to the equity insulation, there is the quickening exit of forbearances and the moratorium on foreclosures protecting those at risk from losing their home.
What do you think was the top Google search in April? Besides Harry & Meghan, of course. Searches for “When is the Housing Market Going to Crash?” were up 2,450 percent in April. Bubbles are for baths, and even though one is fundamentally impossible, the headlines on skyrocketing prices can still be scary. People justifiably suspect that prices will fall, and yet I’m here to say that adequately vetted and growing demand won’t allow this to happen.
2008 vs 2021
Back in the dark ages, there was a flood of unqualified buyers and an absurd abundance of inventory. Looking back on 2008, the basic supply-demand formula was structurally unsound. Buyers were using the honor system to state their income. Really, what could go wrong with that? They were taking out instantly-upside loans of 125% and doing it on already-inflated spec properties propped up by the borderline corrupt and inept intentions of a lot of the players — sorry, that means all of us… lenders, appraisers, contractors and real estate agents. If you stop reading here, please just reflect on the simple fact… in 2008 there was more supply than demand and people were ill-equipped to play in the game.
With interest rates remaining delightfully low, the growing importance of “home” and an increased buyer pool of 30 somethings over the next two decades, demand in Colorado simply won’t crater, assuming, of course, no meteors strike. More likely events that could slow demand (but not derail it) include rising interest rates and herd immunity. But those are to be expected.
False Concerns Over Forbearance
Another unnecessary fear is that forbearance will lead to foreclosure. However, there are only 2.57 million homeowners in forbearance, or 4.9 percent of all mortgagees. Remember, 37 percent of all homeowners own their properties free and clear, so those don’t even count toward that 4.9%. As we approach mid-June, when the largest number for forbearances, statistically, will exit peacefully, the number of active forbearance plans has been declining at a faster pace. Forbearances only remain a concern in hard-hit states (Texas, Nevada, Louisiana), NOT Colorado. Colorado is sitting just 3 states from the bottom of the delinquency list, right where we want to be.. incredibly strong!
Homeowner Equity Elevates
Home equity is and always will be our saving grace in real-estate security. The average homeowner in the U.S. gained equity amounting to $26,300 year over year, and in Colorado, that equity gain year over year was $32,000 (on average). With a 10% appreciation, some saw their home increase in value by 50, 100 or even $200,000!
The average total equity per homeowner in the United States last year was $200,000 and, you guessed it, Colorado is doing better than the standard, with the average equity per homeowner at $254,000. What could you do with that chunk of change? Also, the share of homeowners with less than 10 percent equity dropped to 4 percent nationally. So what? It’s estimated it takes about 10 percent to sell a home the usual way through an agent, allowing the seller to break even or net a profit.
The Big Takeaway
The main point here is that this is NOT 2008! ‘08 had inflated numbers, fewer regulations and risky borrowers taking out even riskier homes without the equity to fall back on. Colorado buyers, what do I recommend? Don’t sit on the sidelines when you lose an offer. Owning real estate will help you create wealth and financial stability. For more guidance on navigating our white-hot real estate market and achieving your homeownership and monetary goals, give us a call at 303.214.6393 today.
Check out our Fact vs Fiction Housing Market Crash video to share this perspective with your clients and friends.