“If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience”
– Playwright George Bernard Shaw
Shaw’s quote should have been heeded by many economists, real estate agents, and many mortgage professionals. It wasn’t.
When confronted with the potential of a housing bubble or reset one year ago the common chorus from market professionals was, “this time the market’s different”, referencing the improved credit underwriting standards and loan quality in the wake of the 2008 housing crash. Yes, today’s market is different, not merely because of improved loan quality, but because of a massive 40%+ artificial surge in home values thanks to unprecedented amounts of stimulus, money-printing, and a near-zero federal funds rate.
The point is we shouldn’t be surprised at the state of today’s housing market. Not one bit. What we can do is glean a few valuable lessons along the way. Lessons such as:
- Refinances of existing reverse mortgages were great but also fraught with risk in that valuable energy was directed away from attracting first-time borrowers.
- In most cases refinances provided a bonafide benefit to homeowners who wanted to tap into a portion of their home’s higher value providing an additional source of cash flow. It also eroded secondary market pricing.
- A red-hot housing market should have triggered the warning bell that it was time to plan for a more frugal lending or real estate market.
- Markets are cyclical. What booms nearly always busts.
- Repeat lesson #4.
- Home values were never based on real market fundamentals such as local home price-to-income ratios.
- Real estate market watchers Zillow, Redfin, and Core Logic repeatedly cheered on a collapsing market and some remain bullish on 2023 housing prices to this day! Some had a clear conflict of interest having purchased homes en masse which shaped their narrative.
- Work-from-home arrangements and migration left urban areas vulnerable to cooling demand, increased inventory, and falling home values.
- Despite rising interest rates and falling home values, millions of Americans over the age of 62 could potentially qualify for a reverse mortgage.
- When discouraged, repeat lesson #9.
- A massive surge in home appreciation is (1) not normal, and (2) should warn that an impending reset or rebalancing of the market is on its way.
In the end, most mortgage professionals, though significantly impacted, weren’t surprised. In fact, some even put contingencies in place for today’s market.
What matters are the lessons learned and taking concrete steps to attract first-time HECM borrowers. What lessons would you add to this list? Leave your input in the comment section below.