Are we in a housing bubble?

Question of the week: Are we in a housing bubble?

Answer: This question was last answered in the WR&MU in February 2018 when the median sale price for a home in the State of California was $552,000, in Los Angeles County $527,000, and the median price in Orange County was $805,000.

This question repeats because many people still remember, some more painfully than others, the housing market collapse in 2008. The feeling is because housing prices grew so high so fast then, and then collapsed 20, 25, 30% or more in some areas, that history must repeat itself.

Must it?

My answer three years ago was, “no, I do not think we are in a real estate price bubble that is ending soon.”

In 2018 I explained that the primary causes of the home price inflation prior to 2008 were no longer present in the housing markets.

With changes in underwriting policies and federal regulations, homebuyers, and refinancers, must show ability to repay their mortgages. Home purchases require a down payment, refinances require equity in the property. Adjustable-rate mortgages are scarce, to the point of almost being non-existent. Mortgage interest rates are historically low, therefor more affordable.

Three years later, my answer to whether we are in an expanding real estate price bubble that is headed to a collapse, or severe correction, is the same. No, I do not think the large increase in prices over the year, two years, three years…is creating an increasingly fragile price bubble that will result in a significant reduction in prices due to a market collapse.

What has happened in the past three years? Median prices across the state have increased significantly, with much of the growth in the past year. For the month of February 2021, the median home price statewide was $699,000, up 20.6% from 2020. Regionally, LA County is up 13.9% to $664,000, and Orange County’s $996,000 median price is 7.3% higher than pre-pandemic February 2020.

What fueled the tremendous value increases? Supply, demand and holding costs.

Scarce supply puts upward pressure on prices if there is no change in demand. Abundant demand puts upward pressure on prices if there is no change in supply. Combine scarce supply with abundant demand and you have an environment that results in very high inflation of prices.

The reason as to scarcity of supply in the past year is pretty simple, the pandemic had homeowners who may have typically been in a selling position due to age, either young and needing a larger home or older and wanting to downsize, desire to move to another area, or other reasons, not wanting to put their home on the market during a pandemic, nor look for new housing.

Scarcity issues became more severe as prices climbed as potential sellers were withholding their homes from the market out of concerns they would not be able to purchase a new home due to the heavy market demand (see WR&MU from March 12th regarding contingency offers).

Demand pressure came from a couple of sources. Initially, demand jumped because of the significant drop in rates from December 2019 to February 2020, in a two month period the 30-year fixed conventional rate dropped by 0.50% (one-half of one percent). This decrease in rates pushed up the amount of a mortgage a family could qualify for to purchase a new home. As rates decreased further, purchasing power increased. Families who thought they would need to wait three, four, five years for their salaries to increase to purchase either their first home or their move-up home were suddenly able to make that purchase.

As the pandemic progressed and the stay-at-home for two weeks to flatten the curve became two months, and no end in site, demand pressure came from families who needed extra rooms for Zoom meetings for school and work. With low rates those extra rooms became more affordable.

Double pressure on demand, scarcity pressures on supply, a perfect recipe for price increases. Practically every home that went on the open market had multiple offers, not two or three multiple but ten, fifteen, twenty multiple offers. Getting an offer accepted seemed to present the same odds as winning MegaMillions or getting struck by lightning.

So now what? Rates are inching up, which could/should put a damper on demand. What about supply, are their factors that could put more homes on the market?

An underlying factor that some feel will increase supply is the question about whether foreclosures will increase supply as those who are in payment moratoriums due to having requested a forbearance from their mortgage having to start making payments?

Yes, there will likely be foreclosures as a result of the federal forbearance and foreclosure regulations (lenders must accommodate borrowers who request a forbearance) expiring. However, the resulting foreclosures will not be significant enough to put a large supply of homes on the market for a few reasons.

First, because of the increase in prices most homeowners have a good equity stake in their properties. For many homeowners who historically may face foreclosure due to lack of payments, instead can put their homes on the market and sell them, payoff the lender and avoid foreclosure. The list price may not be as aggressive as a neighboring home that is not selling due to financial challenges, but with demand still strong such sales should not negatively impact prices.

Second, there are not that many homes currently in forbearance agreements, and data is showing that many who are in forbearance will be able to resume payments and complete their mortgages. That said, as of February the estimate was that approximately 2.7 million homeowners. There are approximately 83 million single family homes in the United States and an estimated 7 million condominiums, this means approximately 3% of homes are in forbearance. Or put in other terms, the amount of mortgages in forbearance is estimated to be $835 million, with a total of an estimated $10 trillion in outstanding mortgages. Essentially, if every mortgage in forbearance were to go through foreclosure, it is a small part of our housing market. Bottom line, I do not think the forbearance issue will have a dramatic impact on supply.

With more and more of the population being vaccinated, government restrictions being lifted, and most importantly more people feeling confident to resume more pre-pandemic normal activities, we should see an increase in supply of homes on the market. Those who have been waiting for the pandemic to move up or move down will be putting their homes on the market and we should see supply gradually increase in the summer months.

With potentially less demand with rates increasing and higher supply with homes coming on the market shouldn’t prices go down? Only if there is a significant decline in demand and increase in supply. Which I do not see happening.

What I do feel is that price increases will flatten, perhaps to less than 1%. Our economy is poised for significant expansion as the hospitality and tourism industries open up for the summer. Employment will increase, creating more consumer spending, add in the trillions of dollars from Washington since last March, and we have factors that will push rates up, slowing but not stopping demand. Supply is so low in the current market that it will take a sudden glut of listings to outpace demand.

The biggest factor that could reverse housing prices to drop will be the economy, will there be a recession in which the jobs lost are not the lower wage jobs that saw the vast majority of layoffs in the pandemic, but higher income jobs that sustain homeownership? This could be a factor to see home prices decline more than 3-5%. It could happen, but absent a significant external event, it does not appear on the horizon.

It took me a while to get here, no we are not in a housing price bubble that is likely going to burst in the near, or medium, future.

Have a question? Ask me!

No changes until 2024. This is the forecast from the Federal Reserve regarding rates, as its forecast is for not lifting of rates through 2023. In minutes released this week from it meeting in March, the Fed is forecasting inflation to rise to 2.4% in 2021, above its stated target of 2%, but decline to closer to 2% in 2023. The news was somewhat expected by investors and little to no impact on mortgage rates.

Rates for Friday April 9, 2021:  After five flat weeks, mortgage rates take a dip down this Friday. With the Treasury selling over $100 billion in debt next week we will see a challenge to mortgage rates to remain where they are. Will investors bidding on government debt show they believe the Fed’s forecast for low rates to continue, or will they react to the tremendous surge in consumer spending and demand coming this summer?

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

30 year conforming                                         2.75%  Down 0.125%

30 year high-balance conforming                   2.875%  Down 0.125%

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 with 740 FICO score for purchase mortgages.

How different is the small talk before meetings this April from last? Instead of where to be able to buy toilet paper or Lysol the conversation is where did you get your vaccine shot and what type was it.

I have been saying that I see a great Saturday Night Live skit where some hipster looking types are sitting in a bar sounding like beer-snobs, talking about body, color, reactions; bragging about what they have had. Instead of talking about beer they are talking about their vaccines.

Move over coffee snobs, wine snobs, beer snobs, and whiskey snobs, the vaccine snobs are here!

For me, I got Moderna, first shot on Wednesday. Went in easy and great finish!

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog