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:
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.