5 reasons a 2009-style real estate meltdown is unlikely now

When it comes to the volatility of the stock market, you may lose your shirt, but you probably won’t lose your home. That’s because real estate tends to be a life raft for investors seeking safety amid volatility when equity markets are expected to turn south.

“Real estate is Americans’ preferred investment for money that they won’t need for at least 10 years and that hasn’t changed,” said Greg McBride, chief financial analyst with New York-based Bankrate.com. “Nervous investors always look to real estate rather than shy away from it in times of volatility.”

But a repeat of the 2009 real estate crash that followed the 2008 rout of the equities market is more unlikely this time. Here’s why you shouldn’t be panicking if you’re looking to buy or sell a home:

Interest rates should stay low

With the latest bout of equities volatility, the likelihood of a Federal Reserve rate increase fades, according to Kevin Finkel, senior vice president of Resource America Inc. REXI, +1.84% , a real-estate investment trust in Philadelphia. “Clearly the risk of higher rates is diminishing right now, and that could bode well for real estate,” he said.

While the refinancing boom has slowed, that’s only because the majority of Americans who could refinance to a fixed rate have already done so, so the impact of “rate-shock” when short-term ARMs readjust will be minor compared with what happened in 2008-2009, when many Americans could no longer afford their new housing payments and defaulted.

Currently, despite an increase in bank repossessions rising to the highest levels in more than two years, the percentage of loans in foreclosure nationally are just 2.1%, the lowest level since 2007, according to the Mortgage Bankers Association. They reached a peak of 4.6% in 2011 at the height of the real estate bust.

“The recent rise in bank repossessions represents banks flushing out old distress rather than new distress being pushed into the pipeline,” said Daren Blomquist, vice president of Irvine, Calif.- based RealtyTrac, a real-estate research company.

There’s less risk of a new mortgage bubble

Unlike the 2009 mortgage meltdown, when so-called liar loans and exploding ARMs flooded the market, the subsequent pullback in credit may have been overly tight, but it does mean in 2015 there are fewer real estate bubbles waiting to pop. While it’s true there are markets that have seen incredibly inflated real-estate values such as San Francisco and New York, it’s not fueled by unsustainably loose credit standards.

“The changes that have taken place over the past five to seven years have built a more stable foundation” in the mortgage industry, said Michael McPartland, a managing director and head of investment finance for North America at Citigroup’s C, +2.56% private bank. “There just aren’t a lot of the exotic products like interest-only [loans] and super-high loan-to-value [mortgages],” he said. “If things slow down, there will be a contraction, but not a pop.”

McPartland says it may be harder for borrowers to afford a 20% down payment and monthly interest payments that are principal and interest, instead of just interest-only, but the flip side is increased home equity (the national average is 30% equity), so home buyers are less likely to leave the keys on the counter and walk away if things go bad. Foreclosure starts in July of just over 45,000 were the lowest level since November 2005, nearly a 10-year low, according to RealtyTrac.

Help for first-time home buyers

Earlier this year, the Federal Housing Administration began reducing insurance premiums on loans by an average of $900 a year, in an effort to nudge first-time home buyers and millennial borrowers who might not have much cash for a down payment to finally enter the housing market. The effort appears to have worked, with FHA loans jumping to 23% of all financed purchases in the second quarter of 2015, up from 19% a year earlier, according to RealtyTrac data. The FHA move may just help push home sales for 2015 to as much as 5.6 million, the most since 2006.

Another move late last year by Fannie Mae and Freddie Mac to begin buying loans with just a 3% down payment, or 97% loan-to-value ratio, may also help boost the housing market later this year, by making lower down payment loan options available to more borrowers. Fannie Mae on Tuesday also announced that it would allow income from a non-borrower household member to be considered as part of a loan applicant’s debt-to-income ratio. That could help some borrowers, who might have family members on Social Security or disability living with them, or a renter in a basement apartment, to boost their income levels and help them qualify for a loan.

Lower oil prices

At the end of 2008, gasoline prices, which had risen to a record $4 a gallon nationwide that summer, had crashed to under $2 a gallon. In that case, the cheap gas (and diesel) wasn’t a good thing, as the worldwide economy was shuddering to a halt.

While China’s economy is still contracting, the U.S. economy isn’t, so the lowest gas prices since 2009 are likely to help the housing market. “The continuing drop in gas prices is freeing up valuable disposable income,” says Finkel, which can help Americans absorb higher rent payments, or move up to a more expensive property.

Job growth

While jobs typically are a lagging indicator of an economic downturn, the U.S. has had a slow but steady rate of job creation for the past five years.

“The economy continues to create jobs, and the quality of jobs being created has improved as the economic recovery has progressed, with professional and business services leading the way. This is indicative of an economic recovery that is sustainable,” said Bankrate’s McBride. And while in this economy, wages have been slow to recover, and it’s been a challenge to get long-term unemployed Americans who no longer count in the official jobless statistics to return to the job market, the job growth has been good enough to boost the housing sector and lure millennial borrowers off the fence.

“If wage growth materializes in a broader way, this will be the catalyst for many existing homeowners to put their homes on the market and finally look for the move-up buy, boosting housing and alleviating the inventory shortage,” McBride said.

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