The financial crisis happened back in 2008…
But 15 years later, it still casts a shadow over nearly every discussion about housing.
I get it…
For the first time in American history, many Americans were “underwater” on their homes. In other words, the sticker price fell below what they paid.
Then, over the following year, unemployment soared to 10%.
It was terrible. And the problems in the housing market kick-started the crisis.
So it makes sense that the industry’s woes are still a dominating topic all these years later.
But that doesn’t mean it’s the right way to look at things in today’s environment.
For example, we’re seeing what some folks would call “creative financing” now. That’s when lenders, buyers, and sellers find unusual ways to get deals done.
If this term reminds you of 2008, that’s OK…
By now, we all know the story of adjustable-rate mortgages (“ARMs”). And we also know all about the havoc these ARMs caused in the housing industry when interest rates soared.
But creative financing wasn’t unique to 2008. It’s not always a bad thing, either…
In fact, it worked in the 1970s. And it’s working again today…
You probably haven’t heard of Kermit Baker. I hadn’t either – until recently.
But Baker’s dissertation was an eye-opener for me…
You see, Baker submitted his thesis to the Department of Urban Studies and Planning at the Massachusetts Institute of Technology in 1984. Specifically, he covered “the housing affordability experience of the 1970s.”
I don’t expect you to find the entire 193-page report as riveting as I did. But today, I’d like to share some key highlights with you…
First, Baker found that housing demand stayed surprisingly strong despite the soaring mortgage payments. In fact, the overall homeownership rate grew in the 1970s.
Baker also found that housing construction stayed strong over this period.
Short-term peaks in inflation did slow homebuilding from time to time. But the slowdowns happened inside the context of an overall strong housing market.
Now, we get to the fun part…
Creative financing was big in the 1970s. And a specific form of it is reemerging today.
You might’ve heard the term “assumable mortgage.” That’s when the buyer of an existing home takes over the seller’s mortgage.
The idea is that the buyer can lock in the lower-than-market rate on the mortgage.
I understand if that sounds kooky or spooks you. It’s unconventional. It does scream “2008” in some ways. And we should always be wary of a phrase like “creative financing.”
But the point is clear…
Creative financing was a real solution in the high-rate environment of the 1970s.
In the 1980s, Baker noted that “creative financing circumvented financial institutions.” And he pointed out that “many households that wouldn’t have been able to purchase a home were able to do so with creative financing.”
Put simply, housing is a baseline need. And for many folks, owning a home is the rational option. That’s true even in the face of high interest rates and high sticker prices.
So the market finds a way. And it will likely continue to do so.
Remember, a 2008-style crash isn’t the only possible outcome. Sometimes, creative financing is good.
Good investing,
Vic Lederman
