Homeownership has developed into a major element of achieving the American Dream. According to recent research by the National Association of Realtors (NAR), over 86% of purchasers believe that homeownership remains the American Dream.

Prior to the 1950s, fewer than half of the population of the United States had their own home. However, following World War II, many returning veterans used the GI Bill payments to purchase a home. Since then, the percentage of homeowners in the United States has climbed to 65.5 percent. Since then, this strong demand for homeownership has kept property values rising. The graph below illustrates the rise in property prices since the end of World War II:

The graph demonstrates that the only time home values fell significantly was during the 2006-2008 housing boom and recession. If you look at how prices surged previous to 2006, it resembles the present two-year price rise. This may cause some individuals to worry that we're about to experience a similar fall in home values to what occurred during the bubble burst. To help alleviate those worries, let's look back at what happened last time and what's happening today.

What Caused the Housing Crash 15 Years Ago?

Foreclosures flooded the market in 2006. This resulted in a significant decline in housing values. The two primary reasons for the foreclosure wave were as follows:

1.      Numerous purchasers were not properly qualified for the mortgage they acquired, resulting in an increase in property foreclosures.

2. Numerous homeowners took advantage of the equity in their homes. When prices dropped, they found themselves underwater (where the home was worth less than the mortgage on the house). Many of these homeowners abandoned their houses, resulting in additional foreclosures. This resulted in a further decline in nearby home values.

This cycle continued for years.

Why Today’s Real Estate Market Is Different

Here are two reasons today’s market is nothing like the one we experienced 15 years ago.

1. Today, Demand for Homeownership Is Real (Not Artificially Generated)

Up until 2006, banks manipulated demand by lowering lending requirements and making it very easy for almost anyone to qualify for a home loan or refinance their existing home. Purchasers and those refinancing a house today face significantly stricter lending conditions from mortgage firms.

The Urban Institute's data illustrates the extent to which banks were willing to take on risk in the past versus today.

When a bank lends money, there is always a risk. However, leading up to the housing crash 15 years ago, lending institutions took on much greater risks in both the person and the mortgage product offered.   This resulted in widespread defaults, foreclosures, and price declines.

Today, there is a genuine demand for homeownership. It is the result of a re-evaluation of the value of the home as a result of a global epidemic. Additionally, lending criteria in the current lending market are substantially stricter. Because purchasers can afford the mortgage, there is little concern about potential defaults.

And if you're concerned about the number of people still in forbearance, rest assured that there is no chance of a home market upheaval today. There won’t be a flood of foreclosures.

2. People Are Not Using Their Homes as ATMs Like They Did in the Early 2000s

As indicated previously, many believed that the dramatic rise in prices in the early 2000s would never end. They began borrowing against their houses' equity to finance new vehicles, boats, and vacations. When property values began to fall, many of these homeowners found themselves underwater, prompting some to abandon their properties. This resulted in an increase in foreclosures.

Homeowners have not forgotten the lessons of the crash, as prices have risen in recent years. According to Black Knight, tappable equity (the amount of equity available to homeowners before reaching a maximum loan-to-value ratio, or LTV of 80 percent) has more than doubled from 2006 ($4.6 trillion to $9.9 trillion).

According to CoreLogic's latest Homeowner Equity Insights study, the average homeowner acquired $55,300 in home equity over the last year. Odeta Kushi, First American's Deputy Chief Economist, reports:

“Homeowners in Q4 2021 had an average of $307,000 in equity – a historic high.”

ATTOM Data Services also reveals that 41.9% of all mortgaged homes have at least 50% equity. These homeowners will not face an underwater situation even if prices dip slightly. Today, homeowners are much more cautious.

Bottom Line

The major cause of the housing meltdown 15 years ago was a foreclosure tsunami. With far tougher lending criteria and a historically high amount of homeowner equity, the idea of massive foreclosures affecting today's market is unrealistic.