Weekly Rate & Market Update 6-2-17

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Question of the week:  Do you think home prices will fall in the near future; are we in another housing bubble?

Answer: Many of the “question of the week” inquiries come up several times in a short period of time from different areas of my life, this week’s question is no different. From a lunch meeting with a real estate agent, to conversation with client thinking about selling her current home and buying a new one, to breakfast conversation with my mom’s cousin, people are wondering with the increase in home prices the past several years if real estate prices will continue to increase, or are in danger of collapsing.

The root of the question is of course the housing bubble burst that caused real estate prices across the country to fall from their peak in 2006 to their lows in 2012. Prior to the price collapse prices rose at first steadily and then dramatically. Fueled by a combination of low interest rates and the availability of mortgages from all sources, especially Fannie Mae and Freddie Mac that required essentially no documentation of ability to repay the mortgages, home prices surged beyond sustainability. Once some borrowers began missing payments causing more scrutiny of outstanding mortgages the price increases slowed, stopped and then reversed. After dropping slowly at first starting in 2006, by 2008 markets saw prices drop at historic rates.

The current market is similar in many respects to the market from 2001 to 2006. During that six year run the national median home price increased from $170,000 to $250,000—a 47% climb in the median price. From 2012 to May 1, 2017 the national median sales price increased from $220,000 to $320,000—a 45% climb in median price.

Just looking at the very large and quick climb in median prices the supposition is that the market parallels are such that we should be ready to experience a sharp and prolonged decline in market prices. That might be true if the reason for the home price increases were the same. They are not.

Our current housing market also has very low interest rates making homeownership more affordable. Our current housing market is supported by low unemployment, just as the 2001 to 2006 market was for much of the price increase.

There are a couple of very strong factors to the current housing market supporting the increase in prices. First, people qualify for the mortgages they are using to finance their purchases. Long gone are the non-qualifying mortgages that were used to finance millions of homes across the country—especially those using conforming (Fannie Mae/Freddie Mac) financing which is approximately 65% of mortgage financing.  Because lending standards reverted to those used historically until the early 2000’s there is no price inflation caused by buyers purchasing more than they can afford.

Second, buyers have a financial stake in their home. Not only was the early 2000’s housing price bubble caused by low rates and no-qualifying loans, it was also fueled by the lack of need for down payment. A significant number of purchases across the country were completed with no-money down transactions where buyers would get a 1st and a 2nd mortgage to cover 100% of the purchase price. With none of their own money in the home and suddenly seeing their home is upside down with a large mortgage payment there was no financial risk in walking away.

Third, the housing crisis and subsequent loss of housing has had an impact on the mindset of the average American, to the extent we now have clients who were in high school or college when they parents lost their home and they do not want to have that happen to themselves.

Fourth, and very importantly, an overwhelming majority of the mortgages being financed in the past several years have been fixed rate mortgages at very low interest rates. This removes future uncertainty for housing costs if a homebuyer hits a rough patch.

I am not saying the current housing market will never undergo some type of a price correction at some point—all market do. When will there be a correction, how big of a correction and how long will the correction market last are the questions that are of interest.

If/when there is a correction I believe it will be driven mostly by employment, or rather unemployment. When our current economic cycle ends and we have our next recession the impact it will have on employment will determine when our real estate market will also have a correction, or reversal in price increases. The length and depth of the recession will determine the length and depth of any drop in market prices.

Because of the overall strength of the average homebuyer I do not feel that any market correction will be deep or long lasting. We may see a prolonged period with very little or no growth in prices, but as for sharp decline in prices I do not foresee a major correction occurring in the next cycle because of the down payment investment from homebuyers and the fixed rate financing on their home.

The statistics on the current market prices are very similar to the housing bubble that burst starting in 2006, however the underlying factors are extremely different. The strength of our housing market today is qualified well employed buyers purchasing a home for the long term as opposed to underqualified buyers leveraging into properties with the purpose of making money as prices climb.

Were I in the market for a new home I would not let the possibility of a contraction in home prices in the short or medium future deter me from pursuing the purchase of a new home. I would not know when that would occur, so prices can climb into the correction. I would not know how much of a correction may occur, it could be only enough to put prices where they are today. Nor would I know how long such a corrective market would last, so I may miss the next “bottom” and end up paying more. Finally, I do not know what rates will be when the market corrects.

In summary by trying to time a market correction I could end up paying more for my home in price and interest rate than if I purchased today.

Have a question? Ask me!


Confidence remains high for consumers across the country. For the sixth straight month the Conference  Board’s consumer confidence survey has a very strong reading. Although the index is lower than April and March, that is not a surprise since they were the two best months for the confidence index through the economic expansion which began in June 2009. As I have been writing recently, there has been a disconnect between consumer confidence and consumer spending and retail sales. Perhaps May will be the month to break out of the lackluster spending from the very confident consumers. A strong, especially a consistently strong, consumer confidence index should be negative for interest rates.

Jobs data for May is interesting. Today’s data from the Labor Department shows an incredibly low 4.3% unemployment rate, down from 4.4% in April and a gain of 138,000 jobs. The former number is well received, the latter is a disappointment to the expectations of 185,000 new jobs for the month. Also in the report was a downward revision of March and April job gains by 66,000 jobs. Drilling into the report we see that the participation rate declined from 62.9% of eligible workers to 62.7%. Wages continue to be stagnant, up only 0.2% in May and 2.5% from May of 2016, slightly ahead of inflation. Overall the report is not a bad employment report, in fact is shows a somewhat healthy but not strong job market, but missing expectations has many thinking the Fed may hold off on a rate hike this month. Overall the news is rate friendly due to the speculation that the lack of a strong job report gives strength to those on the Federal Reserve Open Market Committee who want to hold rates steady.

Rates for Friday June 2, 2017: Rates are softening a bit this week but hang onto last week’s numbers giving us three weeks in a row of flat rates, which is a good thing! Looking ahead we may see some movement with every little report as investors make bets as to whether the Fed will or won’t raise rates. For the most part a rate increase is priced into the market so there should not be any major change in rates.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.75%             Down 0.125%

30 year high-balance conforming                        3.875%           Down 0.125%

30 year FHA                                                      3.25%            Flat

30 year FHA high-balance                                  3.75%            Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.

The calendar flips to June and our kids and their friends at school look at the longest two weeks of the year. As most parents know this is also the busiest time of year as every sport and activity wraps up with final games and performances. Tonight we will be doing something special with many other families. The music teacher at our middle school is retiring after over twenty years and past and present students and families are gathering for a good-bye/thank you party. We look forward to the alumni band playing as well as all stories about the success many have had in music through their lives, with a start from Ms. Norwick at Hughes Elementary.

To all the teachers, and the students, hang in there just nine days left!

Have a great week,

Dennis

 

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