1. The Current Mortgage Rate on Existing Mortgages
First, let’s look at the current rate on existing mortgages. According to the Federal Housing Finance Agency (FHFA), as of the fourth quarter of last year, over 80% of existing mortgages have a rate below 5%. That’s significant. And, to take that one step further, over 50% of mortgages have a rate below 4% (see graph below):
Now, there’s a lot of talk in the media about a potential foreclosure crisis or a rise of homeowners defaulting on their loans, but consider this. Homeowners with such reasonable mortgage rates will work as hard as possible to keep that mortgage and stay in their homes. That’s because they can’t go out and buy another house or even rent an apartment and pay what they do today. Their current mortgage payment is more affordable. Even if they downsize, it could cost more with today’s higher mortgage rates.
Here’s why this gives the housing market such a solid foundation today. Having so many homeowners with such low mortgage rates helps us avoid a crisis with a flood of foreclosures coming to market like in 2008.
2. The Amount of Homeowner Equity
Second, Americans are sitting on tremendous equity right now. According to the Census and ATTOM, roughly two-thirds (around 68%) of homeowners have either paid off their mortgage or have at least 50% equity (see chart below):
In the industry, the term for this is equity rich. This is significant because if you think back to 2008, some people had to decide to walk away from their homes because they owed more on the house than it was worth.
But this time, things are different because homeowners have built up so much equity over the past few years alone. And, when homeowners have that much equity, it helps us avoid another wave of distressed properties coming onto the market, as we saw during the crash. It also creates a solid foundation for today’s housing market.
We are in one of the most foundationally strong housing markets of our lifetime because homeowners will fight to keep their current mortgage rate, and they have a tremendous amount of equity. This is yet another reason things are fundamentally different than in 2008.