The Housing Crisis was a nightmare; mortgages defaulted, housing sales plummeted, people were evicted, and getting a loan seemed nearly impossible. Now that the economy has recovered and home prices are increasing, what is the possibility that we are heading into another housing crisis?
Change in Mortgage Industry
Recently, Fannie Mae and Freddie Mac created new programs to allow first-time homeowners to buy a home with only 3% down. These new programs suggest that the Housing Crisis could repeat itself but luckily the mortgage industry has undergone huge changes.
In July of 2010, the Dodd-Frank Reform Act was initiated to prevent lenders from issuing no-doc loans. No-doc loans did not require borrowers to provide documentation of their financial income. No-doc loans were the reason that many unqualified borrowers were allowed to borrow large sums of money. In addition, the Dodd-Frank Act wanted to break up large banks that had too much power over the financial industry.
Impact of Low Interest Rates
With record low interest rates, many homebuyers are eager to buy a home before the Federal Reserve increases rates. This creates urgency for homebuyers to buy quickly. Yet, home prices are no longer low. Many individuals want to buy homes due to the low interest rates, only to realize that they can no longer afford the prices of homes.
Housing Growth Rate
Documentation of United States housing growth began around 1890. Since then, the real estate market has grown on average about 0.48% per year. This growth has varied by the time period because economic flux causes the growth rate to change. Before the Housing Crisis, when everyone could get a loan and home sales were skyrocketing, the growth rate was 10.11%. Compared to the average growth rate of 0.48%, the growth rate before the Housing Crisis was unobtainable for an extended period of time. Presently, our growth rate is 6.68%. While we must take into account the inflation rates, our growth rates need to stabilize in the near feature to prevent the possibility of a Housing Crisis on a smaller scale.
Government Interference
While the growth rate is increasing, the market cannot take big risks like the government can. Before the Housing Crisis, the government wanted home ownership to be more obtainable for Americans, which caused banks to more easily give out loans. For another Housing Crisis to occur at the same level, the government would have to change laws and reduce restrictions.
By Anna Hellman
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