Weekly Rate & Market Update 7-29-16
Question of the week: With home prices as high as they are do you think we are facing another housing bubble?
Answer: No.
Last week’s data on median sales prices in Southern California resulted in this question being asked a few times. To recap the California Association of Realtors reported last week that the median price of homes in Los Angeles County is up 6.1% from June 2015, Orange County is up 6.0%, Riverside up 6.1%, San Bernardino up 6.0% and San Diego up 4.4%. Home prices have seen strong, and significant growth the past few years, but have not approached the growth seen in the early 2000’s that led to the top of the market in 2007.
Before I get into the fundamental reason for my answer, let’s take a quick look at the history of the bubble. Starting in May 2001 we say the median price for a detached home in the Greater Los Angeles Metropolitan Area increase by the following increments from May to May: ’01-02: 18%, ’02-03: 17%, ’03-04: 23%, ’04-05: 12%, ’05-06: 7%, ’06-07: 9%.
The highest median price in the LA Metro Area was $578,700, in May 2007. The subsequent lowest median price was in April 2009 at $227,400, a drop of 61% for the area in two years.
In the eight years since the nadir the median price has increased to $477,200, and increase of 109%. That is a large increase over an eight year period—however in the eight years prior to the apex of the median price the increase was 187%, with 138% growth from 2001 to 2007. So the growth rate is not approaching the rate during the bubble.
Since 2009 regional median prices have only increased by double digits in one year, from June 2012 to June 2013 when they increased 25% after dip in prices the prior years.
So from a statistical growth stand point the increase in prices are not of “bubble” character.
But more important than the size of the growth is the underlying fundamentals of the growth that lead to my feeling we are not currently in a housing bubble scenario.
There are several factors that went into the housing bubble that popped in 2007 but by far the primary reason was the easy money available for home buyers that exploded the demand side of the market. We received approvals from Fannie Mae that required no income verification, no asset verification and no appraisals—money doesn’t get much easier than that.
Included in the easy-money category was the prevalence of equity lines of credit taking total loan to values to 100%, or more, of the property value. A significant percentage of properties being purchased, or refinanced, were with very little to no money down. So while the property values were rising there was not a corresponding increase in homeowner equity.
The mortgages that have supported the rise in property values since 2009 are extremely high quality mortgages. Almost all homebuyers getting mortgage have been underwritten to more challenging standards than were seen since before the advent of stated income mortgages. Borrowers must verify their income, all sources of funds for down payment, closing costs and reserves, loans are priced based on credit scores—and therefore risk, and appraisals are completed by non-interested third parties with no communication with loan originators.
Furthermore, overwhelmingly mortgages that have been funded in the last eight plus years have been 30 or 15 year fixed rate mortgages. It is rare to see a client who wants, and qualifies for, a five or seven year fixed rate mortgage that then becomes adjustable, and the straight monthly adjustable mortgage is pretty much a thing of the past.
When it comes to refinancing very few homeowners are pulling out equity to purchase consumer items such as boats or cars or to payoff consumer debt. Almost all our refinances have been to lower rate and payments, consolidate an equity line with their first mortgage, or to shorten the term of a mortgage to fifteen or some cases ten years.
A bubble is usually characterized after the fact as the market that bubbled collapses. The current housing market is solid enough that if prices do contract there is little to suggest prices will drop significantly due to the underlying fundamentals: homeowners have equity in their homes, their mortgages are fixed rate with very low interest rates, they are able to afford the payments today and most likely in the future.
In the bubble build up we often felt like we were financing investments for clients who happened to be living in them. Today we are helping families purchase their homes with future value, while important, being secondary to a home that is affordable with stable payments.
The greatest risk to the housing markets and prices today is employment. As long as a family has steady income they can afford the mortgage on their home today, tomorrow and a decade from now.
Home prices have increased nicely over the past few years, but far from the rate that would indicate a bubble. As well the increases have been supported by homebuyers purchasing with quality mortgages that will be paid on time for a long time. These factors mitigating any future price collapse absent a major decline in employment in the region or nation.
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
Not great economic data this week, which may give some ammunition to the politic races the next few weeks. Durable goods orders, an indicator for manufacturing and employment, dropped for the second month in a row, down 4% in June and 6.4% from 2015. Mirroring the drag in durable goods was the initial report for 2nd Quarter Gross Domestic Product showing only 1.2% annual growth in the quarter which follows only 0.8% growth (revised) in the 1st Quarter. These economic indicators give no support for higher interest rates for mortgages.
Rates for Friday July 29, 2016: Rates retain their low levels from last week on this week’s economic data. Any increase in rates will most likely be generated from technical trading, i.e. profit taking, and should be short lived if they do increase. Take advantage of these rates!
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.25% Flat
30 year high-balance conforming 3.50% Flat
30 year FHA 3.00% *** Flat
30 year FHA high-balance 3.25% *** 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. ***FHA rates have may have no points and credit towards closing costs, changes daily.
Thanks for all the messages and notes last week about your own travels through California, up the historic and beautiful highway 1 and other adventurous routes and suggestions for sustenance and/or beverage stops along the way! As I mentioned last week a trip all the way up the Pacific Coast Highway to the Oregon border, or beyond, is one everyone should make at least once—and preferably once a decade. Now we are home and looking at the calendar and next Sunday when our girls get back from their month long adventure at camp.
Have a great week,
Dennis
