The most important difference between the housing market today and the housing bubble
Bank of America Merrill LynchA lot of forces came together in the early 2000s to fuel the US housing boom while putting it at risk of its ultimate crash.
Two trends related to loose lending standards stand out: 1) lots of new homebuyers were able to get mortgages, and 2) many of those new borrowers were able to do so by putting very little money up front. Combining these two forces, you got a massively leveraged housing market.
But this is no longer the case. And this lower leverage may be the most important difference between the housing market today and the housing bubble because it reduces the risk of a major downturn.
Bank of America Merrill Lynch economist Michelle Meyer offered some color on this in a recent note to clients.
She discussed the ratio of the total level of mortgage debt to the overall market value of real estate. This adjusts the amount of leverage and debt in the housing market by the total size of the market. Meyer observes that there's been a huge drop in this measure since the Great Recession:
Meyer then considers some of the causes of the drop in mortgage debt. Debt dropped as a result of the unwinding of the housing bubble:
Liquidation of delinquent debt sounds bad, and it's certainly unpleasant for people losing their homes. Nevertheless, it's reflective of a system clearing out an ugly past.