The recent housing market hasn’t changed significantly. Sellers with homes at low interest rates are not selling, leaving buyers with very limited options.
Even when buyers find available properties, they face financial difficulties due to high median home prices and interest rates.
This deadlock between sellers and buyers has led to misconceptions and misinformation about the market situation spreading on social media and forums.
However, some commonly mentioned housing issues are not true. Let’s look at the four biggest myths about the current housing market and why experts say they are wrong.
1. The housing market will collapse like it did in 2008
Due to the current stalemate in the market, some potential buyers are almost certain that we are in a bubble and hope that it will burst so they can buy homes cheaply.
It’s not unreasonable for buyers to hope for luck amid the dual burden of high home prices and interest rates. However, the reality is that the housing market collapse in 2008 caused the Great Recession, resulting in record unemployment rates. And unemployment doesn’t fulfill anyone’s financial dreams.
Importantly, the current situation is completely different from 2008.
Unlike back then, there is no oversupply of new homes today, sellers are not trying to attract buyers, and home buyers can no longer get loans with little to no money down.
Back then, there was a surge in lenders offering loans to buyers with low credit scores.
While easy credit may sound good in theory, some of those loans were adjustable-rate mortgages with low initial fixed rates. When the fixed-rate period ended and the loan rates rose, some buyers could no longer afford their monthly payments.
Especially in 2008, subprime borrowers who faced unemployment had little to no equity in their homes.
So, when the recession hit, they immediately defaulted on their loans, and many people went into foreclosure.
These conditions do not apply today. Nearly half of today’s homeowners have more than 50% equity in their homes.
Moreover, getting loan approval today is really stringent. Banks have learned a lot from the 2008 crisis and have applied those lessons.
And the reasons for today’s rising home prices are completely different.
The price increases from 2020 to 2022 were driven by inventory shortages and historically low interest rates.
2. Owners with good interest rates will never sell their homes
One of the biggest complaints about today’s housing market is that there aren’t enough listings. And with the fantastic interest rates offered two years ago, many people bought or refinanced; so, what would make sellers move?
From a seller’s perspective, giving up a low long-term interest rate doesn’t make sense.
But in reality, there are always life events that require homeowners to sell.
People get new jobs and need to move. Families grow and need more space or want to live in a specific school district. Retirees downsize or move to a better climate. Elderly people move closer to family or into care facilities. And their homes come on the market. There is no “never” in anything. Even those with good long-term interest rates will sell when they need to.
3. Housing prices will fall if interest rates rise
Many potential home buyers expected high interest rates to bring down home prices. But the relationship between interest rates and home prices is complex.
Interestingly, rising interest rates have not led to price declines in most markets.
In fact, home prices this year vary by city. Prices are still driven by inventory. In the most popular areas, updated, move-in ready homes can still receive multiple offers.
Some buyers are thinking of interest rates and homes separately.
In fact, many experts believe that today’s high interest rates make refinancing possible in the future, and that today’s home prices will likely be higher when low interest rates return.
4. Buyers with good credit scores are subsidizing those with bad credit scores
This misconception stems from a misunderstanding of the new fee structure by government-supported housing finance agencies, Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac are government-supported institutions established to help low-income, creditworthy first-time home buyers secure loans. They don’t directly lend but reduce the risk for lenders by guaranteeing certain loans if the borrower defaults.
These organizations also purchase loans from other lenders in the secondary market and sell them as mortgage-backed securities to investors. This allows lenders to continue making new loans to borrowers.
Fannie Mae and Freddie Mac are essential to the mortgage industry, supporting about 70% of all home loans. Thus, they can set requirements and charge fees.
The new fee structure eliminated upfront fees for first-time home buyers. At the same time, it increased fees for loans unrelated to their mission and for borrowers who don’t need assistance: second home loans, jumbo loans, and cash-out refinances.
Thus, this had little to do with the borrower’s credit score.
Today, we’ve looked at the four biggest myths (or misconceptions) about the current market. As always, be sure to consult with experts when strategizing about real estate transactions.
See you in the next article.
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