2007 vs 2022 What is the Difference and What does it Mean?

 First and foremost as a point of reference, most economic cycles are only about 7-10 years. Now, I understand that this opener probably sounds like I'm suggesting that we're going to be in another recession. No. What I'm suggesting is that we have had an amazing 15 years of growth and a real wild ride for the last 2 and a half years. So if it's not a recession, what the hell is this?

I'm not going to put a label on this because that seems short sighted. I'd rather talk about the variables at play and talk about what it means and what we should expect. First are the factors that caused the recession in 2008. 

Lending restrictions. They were really fast and loose leading up to the recession. It led to the concept of "if you can fog a mirror, you can get a loan". No money down, banks weren't worried about your ability to pay. Already own your home? Great, let's do a cash out refinance so you can get that new car, boat, wave runner, take that vacation, whatever!!! It was pulling money out of an appreciating asset for a depreciating asset. That's like pulling money out of Netflix to buy Blockbuster!!! 

Equity in homes. There was none!!! No money down loans. Pulling money out of homes. Purchasing income properties that don't cash flow. There was just no money. It was all a house of cards.

Human psychology and Inflation. We didn't have the language for it at the time, but it was FOMO and YOLO. Everyone was worried that they were missing out on this amazing opportunity. And if the mortgage was going to be significantly more than the potential rental income, it didn't matter because it was only going to go up in value and you'd eventually get the big payday. This combination over inflated pricing causing pricing increases to feed on themselves. 

2022 is a very different economy. 

Unemployment. Our unemployment rates are at historical lows. Not that long ago, the news was advertising that there were two jobs available for every one person that was unemployed. 

Lending restrictions. We are no longer in the era of "if you can fog a mirror, you can get a loan". Banks have been under a lot of scrutiny and can't just freely give away money any more. As a result, they're requiring money down and the fed is dictating our interest rates. That combination is beginning to have an affect on buyers.

Human psychology. Up until the fed increased interest rates in order to combat inflation, we did have a bit of the YOLO/FOMO going on. However, now that interest rates have gone up, buyers are slowing down and doing what is right for them, not just purchasing what they can. As a result, we are not seeing wild multiple offer situations most of the time. When a property is priced low, we are still seeing multiple offers. 

Equity in homes. Recent lending restrictions have started with the requirement that there is some money in a home even if it's not very much for first time home buyers. The wild ride up has also increased the equity in homes significantly. We currently have a very low delinquency rate for mortgage payments. People have healthy reserves and are not getting too far over their skis in such a way that they can no longer afford their homes. 

How are 2007 and 2022 the same? Why draw the comparison? Affordability. Currently affordability rates are as bad as they were during 2006. However, 2006 was still humming along on a full sprint to the cliff and no effort to not jump off into the oblivion. Now, we are seeing appropriate responses. 20+% year over year growth for real estate is nuts. Our year over year growth is beginning to slow down. This is what should have happened in 2006, but the FOMO was outweighing logical budgeting and safe lending practices. 

We aren't going over the cliff this time. Transactions are beginning to decrease. We have some inventory, but it's not growing at some frightening rate. People are employed. There is equity in homes that isn't there exclusively because of price growth. Pricing is going to adjust based on interest rates. If interest rates didn't change, we may have kept going contingent upon buyers' ability to qualify for these loans. I might argue that our lending restrictions are slowing down this process now in a way that should have happened pre recession. 

I think the way to calculate the future is based on affordability and purchasing power. The fed is trying to slow things down and they most certainly have. The question is how long will they try to slow everything down? Jerome Powell, current fed chair, has been a little less transparent as far as what specific data points he is using in order to determine how to address inflation. His rate hikes have definitely been effective. I think we can also refer to the consumer price index to guesstimate what might happen next. Either way, this is not 2006. We're not flying off the cliff. This slow down is artificially caused by the Fed and it's what they want. Once they slow things down, I'm sure that they will want to target stable growth again. We just got a little out of whack. We're all good.