2 Big Differences Between The 2008 and 2023 Housing Markets

It’s a story The Juice will never forget. 

While talking to friends – present company included – outside a Santa Monica cafe circa 2012 or so, a retired firefighter asked the group: Should I pay off my mortgage? 

This guy had a nice life. Solid pension. A rental property generating income in Long Beach. That’s the place with the mortgage. And a Santa Monica condo he was renting. 

His logic was if he paid off the mortgage, he’d meaningfully increase his monthly cash flow. He was already living comfortably, but a few extra thousand dollars coming in each month would more than seal the deal. 

The loudest response from the group: A guy who said he should take out a home equity loan and invest the proceeds in the stock market. The Juice didn’t butt in, probably because we got some pulp stuck in our throat. How insane, especially coming off of the 2008 housing crisis, which was driven, in part, by large numbers of people tapping home equity. 

Which leads us to the first big difference between 2008 and 2023: The number of underwater (owing more on your mortgage than your property is worth) homeowners dwarfs the number we saw during the 2008 housing crisis. 

We like to check in with Bill McBride, who runs the Calculated Risk housing blog. We strongly suggest subscribing to his newsletter if you don’t already. 

Bill helped inspire today’s Juice. 

During the housing bubble, many homeowners borrowed heavily against their perceived home equity – jokingly calling it the “Home ATM” – and this contributed to the subsequent housing bust, since so many homeowners had negative equity in their homes when house prices declined. Note: Very few homeowners have negative equity now – unlike during the housing bubble. 

Indeed, very few homeowners are underwater in 2023 the way many were in and around 2008. Consider the latest data, quoted directly from a CoreLogic report Bill cited (bold emphasis added):

• Only 2% of homeowners with a mortgage were in negative equity as of the second quarter, roughly the same rate recorded over the past two years. The number of underwater U.S. homes peaked at nearly 26% in 2009.
• As home prices have risen, 6.3% fewer owners (about 75,000 borrowers) were underwater in Q2 compared with the previous quarter.

Which ties right into the second big difference: Even with record amounts of equity, homeowners just aren’t taking out a ton of home equity loans. Activity in that area is modest at best. 

We hit up the major banks to verify. The data from the most searched bank stock in our Trackstar database, Bank of America (BAC), confirms the situation:

• In Q2/2023, BofA originated $2.5 billion worth of home equity loans, down from $2.6 billion in each of the previous two quarters. This number has been steady over the last year.
• The average credit score of home equity extractors in Q2 was 797. 

That last point is key. As McBride noted:

The Fed noted this increase in demand for HELOCs in the October 2022 Senior Loan Officer Opinion Survey on Bank Lending Practices: “banks reported tighter standards and stronger demand for home equity lines of credit (HELOCs).” However, in the January 2023 and April 2023 and July 2023 surveys, the Fed noted that “banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs).” emphasis added

If you read The Juice regularly, you know we’re the first ones to talk trash about debt. And, on consumer debt, we’re right. There’s trouble that has been brewing for a while on the horizon, if it’s not already here. 

That said, existing mortgage debt is healthy. 

According to Redfin:

• 82.4% of homeowners enjoy mortgage interest rates under 5%.
• 62% come in under 4%.
• 23.5% below 3%.

And delinquencies on this debt are looking good. 

So, no, 2023 looks nothing like 2008.

The Bottom Line: All of this said, this good news largely applies to existing homeowners. With the current interest rate on a 30-year mortgage still firmly higher than 7% and prices at or near record highs in most markets, housing remains horribly unaffordable for large swaths of prospective homebuyers. 

So that’s the crisis of the day. Not a mortgage or even a housing bubble crisis. Mortgages are stable and housing prices – despite this odd talk of a cooldown we had been hearing – are strong. It’s an affordability crisis that doesn’t seem like it will get better any time soon.

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