This One Chart Shows Why We Shouldn’t Fear Another Real Estate Meltdown

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MARTIN ADOLFSSON / Gallery Stock

The Housing market had a great year in 2013, with the last reading of the Case-Shiller housing index showing a more than 13% appreciation of home prices year-over-year. The rapid ascent in prices however, has some pundits worried that we may be in the midst of another bubble, especially in some regions of the country like California.

In fact, the co-founder of the Case-Shiller index himself, 2013 nobel laureate Robert Shiller said on CNBC this week that “We’re sort of in the beginnings of another housing bubble.”

But from economist David Blitzer, here’s one chart that shows why we shouldn’t be worried about the housing market suffering another 2007-style bust anytime soon:

ltv

The above chart shows the loan-to-value ratio for all owner-occupied homes in America. In other words, before the crisis, the average homeowner owed roughly 60 percent of his home’s value to the bank, and that percentage has fallen now to 49%. And this change has made the American economy and housing market much more resistant to a dangerous real estate bubble explosion. Writes Blitzer:

“The financial crisis was a two-step (or double dive) event.  First home prices collapsed, wiping out about a third of the value of American homes. Second, a lot of the mortgage debt collateralized by those homes failed creating a cascade of defaults, foreclosures and worse.  The higher the loan to value ratio on a home with a mortgage, the smaller the price drop needed to put the mortgage under water.”

Americans are still in more housing debt than they were a decade ago, but we’re on much more solid ground that in the years leading up to the crisis.

This is not to say that homes in some markets aren’t overvalued. Each market is different, but until the loan-to-value ratio of real estate in this country starts to creep back up towards pre-crisis levels, we’re likely not in danger of suffering from a real-estate instigated financial crisis like we saw five years ago.

8 comments
JonasSmith1
JonasSmith1

That particular blog post is written artistically and it includes many practical knowledge for everybody. I guess you've carried out a great job of handling this delicate

mypropertystores01
mypropertystores01

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szentmiklosy
szentmiklosy

Your not listening to the media, you have to listen to them. Everything's great, every things fine. So your making less than you ever have? Not really look at this chart, look at these numbers. 

Just ask anyone the economy sucks, people work long and hard for their money. Even in areas like the Northeast theres stiff competition for work whether it be white collar or blue collar. We are not confident in anything! Its only a matter of time when we wake up see violence in the streets with the people becoming discontent. 

michaeldbaron
michaeldbaron

I'm sorry is this article from Jan 4th 2006?  WE HAVE NEVER LEFT THAT BUBBLE!


Shoeguy
Shoeguy

Returning to 2006 prices without incomes rising to match is not a "recovery".

JayAllanby
JayAllanby

Appraisers are unable to provide bogus and inflated appraisals today due to rule changes. This was a significant factor in the last housing bubble. 

AdrianSanchez
AdrianSanchez

It's not all about loan to value.  You have to look at a variety of contributing factors.  You have to look at the escalating rent prices in an economy that doesn't reflect wage increases beyond inflation.  You have to look at supply vs. demand.  Here in Miami, they are building so much, it's getting out of control again.  Maybe we are not looking at a meltdown of equal proportion to what we saw a few years ago, but the current appreciation, at least in the South Florida market is not sustainable.  There are 250 properties/day running through the foreclosure auction calendar at the clerk of courts.  Of those 250, maybe 5%-10% are being sold to cash, third party buyers.  So where are the other 225 units going?  Back to the banks.  This is creating shadow inventory.  Look for these same banks to start releasing these properties into a market that is already saturated with new construction projects.  I think we will see another dip by 2015.  Not as bad as in 07 because, as you mentioned in your article, the LTV's are a little better this time around, but it will happen.  At least that's the opinion of a Real Estate Broker who has been in the business here in Miami for 10 years.  

jeff.ashlock
jeff.ashlock

@AdrianSanchez makes good points. Also the trouble started in 2007 when the easy money dried up. The 60% LTV was a result of crashing values, not the cause. The LTV rose to over 60% as values fell and the LTV is now recovering with the market (in most areas). We are stronger in this market because the criteria required for loan approval is so much more demanding. It's not the "your approved if you can fog a mirror" standards that lead to the crisis.