Hous­ing bub­ble or not, the real es­tate mar­ket is in trou­ble

De­spite soar­ing home prices, other fac­tors needed to in­flate a hous­ing bub­ble are ab­sent from the real es­tate mar­ket.

National Mortgage News - - Contents - By Brad Finkel­stein

First, some good news. De­spite the me­te­oric rise in home prices, the real es­tate mar­ket hasn’t ven­tured into hous­ing bub­ble ter­ri­tory.

The bad news? Home prices are still go­ing to de­cline, and mort­gage de­faults are likely to rise. It’s sim­ply the na­ture of a cycli­cal mar­ket. “It’s in­ter­est­ing to watch the dy­nam­ics of the mar­ket. What we see is prices rise, sales ac­tiv­ity slows down, prices weaken and then sales pick back up,” said Car­ring­ton Mort­gage Hold­ings Ex­ec­u­tive Vice Pres­i­dent Rick Sharga.

“It’s the way a hous­ing mar­ket is sup­posed to be­have in a nor­mal en­vi­ron­ment. But it’s been so long since we’ve seen a nor­mal en­vi­ron­ment that we for­get how it’s sup­posed to work.”

While it’s true that cer­tain hous­ing mar­kets are over­heated, “it doesn’t mean nec­es­sar­ily that to­mor­row or next week or next month or even next year prices are go­ing to crash. But it’s pru­dent be­ing a lit­tle more cau­tious about in­vest­ments in those metro ar­eas,” said CoreLogic Chief Econ­o­mist Frank Nothaft.

“Even though CoreLogic’s na­tional home price in­dex, as of Oc­to­ber 2017, got to the same level it was at the prior peak in April of 2006, once you ac­count for in­fla­tion over the en­su­ing 11.5 years, val­ues are still about 18% be­low where they were,” Nothaft said.

CoreLogic found in com­par­ing 380 metro ar­eas that in Jan­uary 2000, 6% were over­val­ued while 87% were at value. But by Novem­ber 2006, 67% were over­val­ued and 32% were at value.

At the bot­tom of the mar­ket in March 2011, 7% were over­val­ued, 42% were at value and 52% were un­der­val­ued.

As of De­cem­ber 2017, there was a more even dis­tri­bu­tion among the three groups: 33% over­val­ued, 35% at value and 32% un­der­val­ued. Spec­u­la­tive over­build­ing, along with prop­erty flip­pers ob­tain­ing mort­gages un­der false pre­tenses (like ap­ply­ing as an owner-oc­cu­pant, rather than an in­vestor) helped in­flate the mid-2000s hous­ing bub­ble, said Fan­nie Mae Chief Econ­o­mist Doug Duncan.

While a re­ces­sion in the near term seems un­likely, Duncan is con­cerned about whether the Fed­eral Re­serve can man­age a “soft land­ing” of the econ­omy.

Still, if there is a re­ces­sion, ex­pect mort­gage loan de­faults to rise. “Delin­quency is highly cor­re­lated with un­em­ploy­ment. So any­time you have a re­ces­sion, on a lag ba­sis you will have a rise in delin­quency and fore­clo­sure,” Duncan said.

“That’s a nor­mal cycli­cal pat­tern. That’s not ev­i­dence of a bub­ble.”

Where prices have gone up, they’re driven by eco­nomic growth and in­come growth, said Ga­gan Sharma, pres­i­dent and CEO of the mort­gage ser­vicer BSI Fi­nan­cial Ser­vices. “So that gives me con­fi­dence that things are mov­ing well. But things could change if the econ­omy takes a down­turn.”

He is more con­cerned about hot mar­kets where home prices were driven on a re­liance of a sin­gle-job sec­tor like tech­nol­ogy for Sil­i­con Val­ley and Seat­tle, rather than ris­ing rates.

“Most peo­ple have fixed-rate mort­gages, very few peo­ple have ARMs. So if I am some­body who took a mort­gage in the last five years, maybe I won’t buy a new home, maybe I won’t buy the next big­ger home and I’ll stay in my ex­ist­ing home a lit­tle bit longer than usual,” Sharma said.

Since the start of the year, rates for 30-year fixed loans have in­creased 50 ba­sis points to 4.47% for the week ended April 19.

“If mort­gage rates should move higher, then that just erodes af­ford­abil­ity fur­ther in those mar­kets that have had very rapid price growth and those mar­kets that have very high house prices,” said Nothaft.

“And that could con­trib­ute to a fur­ther slow­down in price ap­pre­ci­a­tion.”

When­ever the eco­nomic down­turn does come, peo­ple are in much bet­ter shape to deal with it, said Art Yeend, di­rec­tor of busi­ness de­vel­op­ment for the Bar­ent Group, a due dili­gence firm.

A decade ago, the col­lapse led to a wave of strate­gic de­faults by un­der­wa­ter bor­row­ers. The econ­omy is much health­ier and loan un­der­writ­ing has been tighter.

“How would [un­der­wa­ter val­ues] im­pact the bor­rower’s in­cen­tive to pay? It would be dif­fer­ent this time around be­cause they would be more able to pay,” Yeend said.

The next re­ces­sion is more likely to have a re­gional im­pact than a na­tion­wide one.

“Then the ques­tion will be how much does un­em­ploy­ment rise rel­a­tive to house prices in those mar­kets where un­em­ploy­ment rises more?” Duncan said.

Home price par­ity The share of cities with over­val­ued hous­ing mar­kets is half of what it was at the peak of the last hous­ing bub­ble

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.