The biggest problem in real estate is NOT high rates, affordability issues, inventory issues (too much or too little, depending on the market), increased numbers of contract cancellations, or declining values in the Sunbelt.
The biggest problem in real estate is the 5 to 9 million qualified buyers sitting on the sidelines because the media and the crash bros have made them too nervous to buy (a topic I’ve blogged about many times).
I will share a chart below that will definitely make nervous homebuyers far less nervous.
But first, I have to explain this.
A major catalyst behind every asset bubble, overheated economy, and an eventual bust is this: Excess Credit – or too much lending and borrowing.
Too much lending is caused by relaxed credit standards, a too-loose monetary policy (too much money floods the market, so banks and investors get desperate for “yields” and make bad loans), and excessively low rates.
We had ALL of those ingredients and then some before the 2008 crash.
When banks lend too easily, asset values over-inflate, borrowers can’t make payments, and borrowers end up defaulting – crushing banks, entire economic sectors, and sometimes entire economies.
And here is the magical chart that should convince everyone that we are not going to see a repeat of 2008:
This chart from the Mortgage Bankers Association shows how much easier it was to obtain mortgage financing before 2008 than it is today.
Point: We are nowhere near a credit bust – when it comes to mortgages.
Logan Mohtashami (the Chief Crash Bro Fighter) shared the above chart on X today. He attributed the tightening of credit standards to new laws and regulations, but I think he’s wrong there.
Credit standards tightened because Fannie Mae stopped buying bad loans and rating agencies stopped lying about their credit quality, eliminating the market for those loans.
Mohtashami also shared the MBA Purchase Applications Index chart below, showing the number of buyers getting pre-approved for mortgages.
The number peaked in 2005, when anyone and everyone could get a loan, and we have yet to come close to that number since – even during COVID when rates bottomed and we thought it was a purchase frenzy for the ages…
