The Expert Podcast

Remember the market crash in real estate in 2008, the big real estate bubble that blew up? A lot of times, there are references to that in the current real estate market, thinking that the same thing’s going to happen in 2022 or 2023. It’s going to be a bubble, it’s going to blow up. Well, here’s one of the reasons why many experts think that’s not going to be the case. Here’s one of the hottest markets in the country, DFW, which is the Dallas market, one of the lowest percentages of underwater mortgages in the nation.

What happened in 2008 was that mortgages were underwater, meaning that people owed more on the house than it was worth. A lot of the foreclosures that happened in 2008 were what’s called "turn in your keys," meaning that you just walked away from the house. You didn’t actually get foreclosed and evicted; you just turned in the keys and walked away because you owed more on the house and it was worse. So why bother? That’s not the case now. It’s very rare to have a house be worth less than the mortgage because houses have gone up in value.

Even if they go down in value 20, 30, or 40 percent—which would be extremely unlikely—it’d be very difficult to have underwater mortgages. Why? Well, first of all, real estate values have gone up. Even if you lose half of the increase, you’re still going to be above where most people purchased their house. The other thing is there are no more zero-down mortgages. Everybody has to put down at least 10, probably 20 percent. Many times, it was a higher percentage because if you bid over the listing price, you had to kick in the cash yourself because of the appraisal. Back in 2005 and 2006, people could breathe on a mirror, have no money down, and get a house. That’s why people were underwater—they had no equity or negative equity, for that matter. In 2022, very few people have purchased a house that is not worth way more than what their mortgage is, even if they purchased it recently. Prices have still gone up, so that’s going to keep people from having negative equity.

Well, there’s another reason you can get foreclosed, and that is if you can’t afford the payments—if your mortgage payment is too high for your income. Well, most people who have mortgages have a two, three, or maybe four percent mortgage. Only recently did mortgage rates go up to five or six percent. More importantly, when banks are underwriting mortgages for the last 10 years, debt-to-income ratio has been extremely important. Gone are the days of no income verification, or even if you have income, just buying however much house you want. They’re very strict on how much house you can buy based on your income, and if it’s not like a third of your income goes to the mortgage, you’re probably not going to get approved.

So, it’s very unlikely that somebody would not be able to pay their mortgage payment because they were extremely conservative at the bank about putting people in houses with higher payments than their income supported. So, you have two sides of the coin—income and equity. Both of those are extremely beneficial to the property owner, which is going to make it unlikely that a lot of people are going to be trying to bail out of their houses.

Look, even the people who bought a house recently, who maybe they paid too much, they just got their house. They’re not looking to get out of it anytime soon. They bought it for a reason—because they were in an apartment or they have to move to another part of the country. They’re not looking to dump that house. They can afford the mortgage and have equity. Maybe they decided they don’t like the area that much, or maybe they want a greener backyard or whatever. But there’s not that urgency to sell like there was when you’re $200,000 upside down in the house, or you literally can’t afford your payments. So, there won’t be the panic selling that there was in 2008 and 2009.

The financial markets are much more resilient now. You don’t have the collateralized debt obligations that put the financial markets in turmoil. These are all very heavily underwritten by the banks, so hopefully, it gives you some peace that the market’s probably not going to blow up. Are the prices high or out of line? That only remains to be seen in the next couple of years. I’ll tell you this: in 2020 and 2021, when people saw the prices go up and they thought it was out of line, there were a lot of people who wished that they bought then because they even got more out of line in 2022.

Even in the face of more inventory and people facing six percent mortgages, the prices aren’t really going down. Some of the high asking prices are being shaved a little bit, there’s less bidding wars, but the prices are not dropping like a stone down below 2021 or 2022 prices. They’re staying right where they were.