The National Association of Realtors (NAR) recently announced certain red flags that caused the housing crisis in 2005, and then  compared them to today's real estate market. Those four red flags are:

1. Price to Rent Ratio

2. Price to Income Ratio

3. Mortgage Transactions

$. House Flipping

All four categories were outside historical norms in 2005. Home prices were way above normal ratios when compared to both income and rents at that time. 

NAR pointed out that mortgage transactions as a percentage of all home sales were also at a higher percentage: 

“Loose credit was one of the main culprits of the housing crisis. Mortgage lending expanded dramatically as unhealthy housing speculation reached its peak and was met by the highest level of credit availability as measured by the Mortgage Bankers Association. The index measures the overall mortgage credit condition by the share of home sales financed by mortgages. This metric does not capture credit quality, but it does set a view of the importance of financing in supporting the housing market.”

House flipping was rampant in 2005. As NAR's research shows: 

“Heightened flipping activity is a clear indication of speculation in the real estate market. A property is considered as a speculative flip if the property is sold twice within 12 months and with positive profit. Flipping is a normal part of a healthy housing market. In an inflated housing market, expectations about short-term profit from pure price appreciation are very high; therefore, the level of flipping activity would show evidence of being heightened.”

Here are the categories comparing the above normal ratios and numbers of 2005 with today's market. A negative percentage reflects an improvement in the condition:

Summary: These red flags are being closely monitored today, compared to 2005, when they were ignored. 

Posted by Andreas Holder on
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