You may be concerned that the housing market is about to crash, but there are a number of reasons why this housing market is different from the one we experienced in 2008. One of them is the variation in lending standards today. Here are some examples of the data that support it.
The Mortgage Credit Availability Index (MCAI) is released each month by the Mortgage Bankers Association (MBA). According to their website:
“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is . . . a summary measure which indicates the availability of mortgage credit at a point in time.”
In essence, the index determines how simple it is to obtain a mortgage. Take a look at the graph below, which shows the MCAI’s data collection since it began in 2004. It demonstrates how lending criteria have altered over time. This is how it operates:
- Mortgage approval is simpler when lending requirements are lax, and the index (the green line in the graph) is higher.
- Mortgage approval is more difficult and the index line is lower when lending standards are stricter.
The index was around 400 in 2004. However, it increased to over 850 by 2006. The situation has significantly changed since then. Since the crash, the index has decreased as a result of tighter lending standards, making it more difficult to obtain a mortgage today.
The housing bubble was fueled by lax lending standards
Lending requirements were much less stringent at the time, which was one of the main causes of the housing bubble. According to Realtor.com, it is explained as follows:
“In the early 2000s, it wasn’t exactly hard to snag a home mortgage. . . . plenty of mortgages were doled out to people who lied about their incomes and employment, and couldn’t actually afford homeownership.”
The high peak in the graph above shows that obtaining credit was much simpler before the housing crisis, and loan requirements were not at all onerous. In those days, getting credit was simple and the bar for getting a loan was low.
Without always conducting a verification procedure to determine whether the borrower would probably be able to repay the loan, lenders were approving loans. This indicates that lenders were providing credit to a greater number of borrowers who posed a greater risk of loan default.
The ability to obtain loans is much more difficult today
As previously mentioned, lending criteria have significantly changed since then. The difference is as follows, according to Bankrate:
“Today, lenders impose tough standards on borrowers – and those who are getting a mortgage overwhelmingly have excellent credit.”
If you take a closer look at the graph, you’ll see that the index line dropped sharply and has remained there ever since the peak around the time of the housing crash. In fact, the line is much lower than even the 2004 standards, and it is only getting lower. The most recent update is from May, according to Joel Kan, VP and Deputy Chief Economist at MBA:
“Mortgage credit availability decreased for the third consecutive month . . . With the decline in availability, the MCAI is now at its lowest level since January 2013.”
We are clearly far removed from the extreme lending practices that caused the crash, as evidenced by the declining index, which indicates that standards are becoming much stricter.
While it’s impossible to predict the future with certainty, it’s clear that the housing market today is not the same as it was in 2008. Lending standards are much more stringent, with fewer risky mortgages being offered and the presence of the CFPB to help protect consumers. While some may still have concerns about the housing market, it’s important to remember that this time around, the industry as a whole has learned from the mistakes of the past and is taking steps to avoid another crash. So if you’re thinking about buying a home, don’t let fears of another housing market crash dissuade you – the current market is much more stable and better equipped to handle fluctuations.