People have been screaming about the collapse of the housing bubble on social media sites for more than 12 years. The truth is that home credit in the United States looks very different than it did in 2005, 2006, 2007 or 2008. In reality, homeowners have never looked better and data from the Federal ReserveThe Quarterly Household Debt and Credit Report shows why.
Homeowners are not the people we need to worry about this time. Renters, younger renter households, and those with lower FICO scores are those showing credit stress today. Homeowners, on the other hand, are sitting pretty and are the envy of the world.
Bankruptcies and foreclosures
After 2010, qualified mortgage laws came into play and all the exotic loan debt structures in the system, especially during the pre-lawsuit period between 2002 and 2005, disappeared. This means that housing should only show financial stress when people lose their jobs and can’t pay their mortgages, not because loan structures are a ticking time bomb.
As shown below, we saw massive credit stress in the data from 2005 to 2008, all before the job loss recession occurred. She was there for everyone to see and read. Now, that same graph shows that homeowners have no credit stress. So, for those who still say housing is in a bubble: Where is the problem?
Of the report: About 40,000 people had new foreclosure entries on their credit reports, mostly unchanged from the previous quarter. New foreclosures have remained very low since the CARES Act moratorium was lifted.
FICO Score and Cash Flow
When I speak at events around the country and put up this graphic, I always say, what a beautiful graphic! This is because after 2010, people took out 30-year fixed mortgages and each year, as their salaries increased, their cash flow improved against the cost of their home debt. Then add three waves of refinancing in 2012, 2016, and 2020-2021 and you can see why homeowners are in a good situation.
During inflationary periods, wages grow faster than usual, so real estate debt costs much less. Additionally, people are living in their homes longer and longer as they age, and their annual income reduces their housing costs. A note on this topic: we had an explosion of homes with FICO scores of 740+ during COVID-19. Many novice economists said it was FICO score inflation. But the data has been the same since 2010: we simply originated more loans during this time (purchases and refinances), so the data didn’t improve, it stayed more or less the same.
Of the report: The median credit score for newly originated mortgages held steady at 770, while the median credit score for newly originated auto loans was one point higher than last quarter at 720.
When the next job-loss recession hits, we should all expect credit stress in the real estate sector to begin to increase. Every month, people get laid off and can’t find work right away. This is why unemployment claims are never zero and we are constantly backlogged by 30 to 60 days each month. However, since we are working from historic lows in credit delinquency data and the owners’ households are in such good financial shape, the credit stress data will not be like what we saw in 2008.
Over 40% of homes in America don’t even have a mortgage and we have a lot of equity sitting around, so in the worst case scenario, many homeowners who bought homes between 2010 and 2020 have a ton of equity and can sell them. Remember, the foreclosure process typically takes 9-18 months from start to finish, which means homes come on the market as a bid from the market due to the legal process we have in-house. This is very different from 2008, when we had four years of credit stress building up in the system.
Of the report: Early default transition rates for mortgages increased by 0.2 percentage points, but remain low compared to historical standards..
Hopefully, between the charts and explanations, you can see why it’s not housing in 2008. However, we do see credit stress in the data for younger households and those with lower FICO scores. The people Jerome Powell says he wants to help at every meeting are showing credit stress.
The Federal Reserve overlooked the credit stress of the housing bubble when it was evident in the run-up to 2008, and is now turning a blind eye to non-homeowners by keeping policy too tight, out of a certain devotion to an inflation of the 1970s. a model that does not exist today. Or, as I’ve said since 2022, they’re old and slow. It is the nature of the beast.