Why Has the Housing Market Not Crashed in Over 15 Years?

Before I begin, I am not an economist. I don’t study the jobs report, watch the Dow, or follow economic TikTok accounts. I’m just a guy who loves real estate and pays attention to changes in strategies and financing based on what I see in my market and what my clients experience during transactions.

If you are looking for an in-depth look at how nonperforming mortgages were bundled and sold as “can’t-miss” investments, this isn’t the place, but you should definitely watch The Big Short. If you want to understand how things are different today for boots-on-the-ground investors than they were 15 to 20 years ago, continue reading.

The Way It Was

One of the things newer investors always tell me is that they’ve been waiting for “the crash,” and that’s when they’ll jump in and take action. I even had a conversation with a novice investor recently who said she read an article stating that our local market was poised to drop by 60%, and she’d start investing as soon as that day came, quite to the contrary of every piece of evidence available. 

People need to understand that the crash of 2008 was a once-in-a-lifetime occurrence, completely different from the normal fluctuations in the market that occur every few years. 

But seriously: Why hasn’t the market crashed? Rather than show you a bunch of charts and talk about the latest jobs report, I’m going to tell you about what it was like back in the day when I was just starting: cruising around, driving for dollars in my Model T, wearing a top hat and monocle. That’s right—all the way back to the early 2000s. 

I certainly wasn’t following the market. I was boots on the ground, learning as I went and taking advantage of whatever real estate or financing opportunities presented themselves.

The one thing that people who weren’t in real estate 20 years ago need to understand is that you literally could do any deal with no money down using a conventional loan through a bank. No, not only on primary residences but investment properties, too. 

Read that again: You could go into your local bank branch and get a mortgage on an investment property and not put a penny down. This lack of skin in the game was one of the many reasons that set the stage for the last “crash.” 

Not only was it possible to buy investments with nothing down, but you could also do it with stated income. If you aren’t familiar with that term, it means exactly what it sounds like. Rather than providing documented proof of how much money you made, you could just tell the lender how much you made, and they would say, “Okay, if you say so, we trust you to be honest,” and they’d lend to you based on your word. Consider that versus the literal never-ending mountains of documentation lenders require now. 

Banks were heavily leveraged, and consumers had no skin in the game at all. What do you think happened when a novice investor jumped into a project and got in over their heads? They’d just walk away since they had no money in the deal. 

That happened not only on smaller deals, but people doing small-scale development projects were in the same boat—100% financing, and when things got hard, they could walk away, leaving the lender holding the entire bag and then some. 

Banks called them “piggyback” loans. Basically, you would get a mortgage for 75% of the appraised value, and they’d give you a second mortgage at the same time to cover the down payment. I was able to do my first few deals that way—just bought fixers on the MLS and BRRRRed them before there was such a thing as BRRRR. 

Thank goodness for those loans back then because I was on a salary of $17,500, working 60 hours per week at the time. No way could I save up a down payment. 

As for appraisals, oh boy, has that process changed. Many newbies don’t know that when a lender orders an appraisal, it’s actually put out in a system not too different from eBay. Appraisers see the property and the date the lender wants the appraisal back and offer to do the job by a specific date and for a certain price, and the lender can accept or reject the offer. The lender can’t reach out to anyone specific; it has to be random. 

Back in my day, my lender would call their buddy and tell them how much the property needed to be appraised for. They’d high-five each other, drink a couple of beers, and send the appraisal report over. 

That’s it. Easy-peasy, you get the value you wanted, sometimes just as a desktop appraisal, no need to even walk through the property. In today’s market, there’s more accountability and much less of the back-scratching that contributes to crashes. 

Finally, you wanted to house hack? Buy a place and fix it up, or rent it out in a couple of years? No problem! 

There was a period of time when you could get a conventional loan from some lenders for 125% loan-to-value (LTV). Yeah. 125%. You could literally walk away from buying a home with a check for tens of thousands of dollars. 

I have a buddy who did that, and he used the “proceeds” to buy a new truck. Well, that may very well have been the most expensive truck that anyone has ever purchased, but he got a brand-new truck and house without coming out of pocket one penny. Insane, no?

What About Now?

Now let’s circle back to the original question of “Why hasn’t the market crashed yet?” Because lenders have learned, literally the hard way, that investors must have skin in the game. Banks aren’t in the business of building real estate equity or flipping houses, and by letting investors buy with no money down, it was easy for investors to walk away from deals that went haywire. That’s an expensive proposition for an investor now. 

Also, the appraisal process has been randomized, and personal relationships and handshake deals are a thing of the past when it comes to valuing properties for a lender. Now, banks get impartial valuations from appraisals, and they don’t lend to investors who won’t or cannot invest in their own deals. This type of checks and balances contributes to market stability, not crashes. 

Final Thoughts

Man, those were the days. But I have to admit, I’m glad things have changed. New investors wanting the market to “crash” don’t understand that when that happens, banks simply don’t lend money—especially to newbies with zero experience. Even if real estate values dropped by 60%, unless you are already rich, you certainly aren’t going to build a portfolio during that time. 

It may seem crazy to say, but be thankful that real estate is stable and it’s hard to get loans and make properties cash flow—the very policies that created this environment are also protecting the value of your assets. 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.