Why Today's Housing Market Isn't A Deja Vu Of 2008

In the shadow of the 2008 housing crisis, it's understandable that some potential homebuyers today may be wary of a similar fate befalling the current housing market. However, there are many reasons why the present market differs greatly from that of 2008, one of the most critical being the distinct changes in lending standards. Let's delve into the data that illustrates this.

Each month, the Mortgage Bankers Association (MBA) publishes the Mortgage Credit Availability Index (MCAI). According to the MBA 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.”

To put it simply, this index gauges the ease of obtaining a mortgage. The following graph showcases the trajectory of the MCAI since it began tracking this data in 2004. The trends help us understand how lending standards have transformed over time.

A higher index (the green line in the graph) corresponds to less stringent lending standards, making it easier to get a mortgage. Conversely, a lower index suggests stricter lending standards, making mortgages harder to obtain.

In 2004, the index stood at around 400. By 2006, it had escalated to over 850. The present scenario paints a different picture. Following the crash, lending standards tightened, causing a decline in the index, and thus making it harder to get a mortgage in today's market.

Watch Lending Standards For Mortgage Risk

The housing bubble was significantly fueled by lax lending standards. Realtor.com offers some insight:

“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 graph's towering peak suggests that in the period leading up to the housing crisis, obtaining credit was much easier, and loan requirements were notably lax. Back then, credit was abundant, and the qualifying criteria for loans were minimal.

Loan approvals were often issued without thorough verification processes to ascertain the borrower's likely ability to repay. This meant that more loans were extended to borrowers with a higher risk of default.

No More NINJA Loans

However, lending standards have significantly evolved since then. Bankrate describes the transformation:

“Today, lenders impose tough standards on borrowers – and those who are getting a mortgage overwhelmingly have excellent credit.”

Looking back at the graph, the index's dramatic decline following the peak around the time of the housing crash is notable. In fact, the index is significantly lower than it was in 2004, and it continues to decrease. Joel Kan, VP and Deputy Chief Economist at MBA, provides the most recent update from May:

“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.”

The falling index indicates tightening standards, further distancing us from the extreme lending practices that contributed to the housing crash.

The lending standards leading up to the housing crash were significantly more relaxed, with little scrutiny applied to a borrower's potential to repay their loan. Today, both lenders and borrowers face reduced risk thanks to stricter standards. This stark contrast between the two markets serves as a reminder that the current housing market is not a repetition of the past.