Your Home: The next housing bubble?

Who would have ever thought a sweet little word like “bubble” could be so scary to buyers and sellers. But it is. One of the most often received questions lately has been,”Are we headed toward another housing bubble?”

And my answer is: “Depends on what you mean by bubble.”

Are we approaching the pre-recession values that helped cause the housing crash in the mid 2000s? Yes we are. A recent CNBC article about home equity said that nationally we are just a little less than 3 percent under the June 2006 value peak prior to the financial crisis. It went on to say that currently 23 states have already passed their 2006 peaks. Many of the markets that we work in every day have most certainly passed their peak from 2006. On several occasions this year I have been surprised at the values our market is supporting based on the high demand.

So back to the bubble… Do I think that we are reaching a value peak again in our market? I think we are close, and in some micromarkets we are there already. For example, the $175,000-$200,000 price range has been explosive this year. The demand in almost all areas in unsustainable, which has caused bidding war after bidding war. This has also caused the dollar per square foot numbers for smaller houses to increase dramatically. At some point, a buyer is only willing to pay so much for a two-bedroom, one-full bath home.

In some markets I feel we have reached that point. I say this because I am hearing the frustration from the buyers and their agents out there about the pricing. In many cases, buyers have decided that they are not interested in the frenzied competition after loosing several homes to other buyers and have decided to bow out at this time.

This “bowing out” is usually one of the first signs of a shift in the market. A shift, but not a bubble. In my mind, a substantial difference between today and the days before the financial crisis began is that borrowers and lenders are both leery of the overall market stability. This same CNBC article said 38 million Americans now have 20 percent equity in their homes. To put that number in perspective, only 24 million Americans had that much equity when the markets hit the bottom in 2012. That said, while 42 percent of the loan originations in the first quarter were “cash out” refinances, the homeowners only borrowed $20 billion. According to Black Knight Data and Analytics, this is only one half of 1 percent of the equity available to homeowners.

In addition, lending practices are much more stringent compared to the “willy nilly” practices that occurred pre-recession. The investors backing today’s loans want to make sure that before they lend, they have a solid borrower. Especially as it pertains to credit score and debt-to-income ratio. In addition, the appraisers who complete the appraisals for both refinances and purchases are under intense scrutiny from the investors. Their process is much more detailed in an effort to ensure the appraiser’s valuation is accurate and timely.

Freddie Mac’s Chief Economist, Sean Becketti, was quoted saying, “During the mid-2000s, as house prices went up, borrowing went up almost dollar for dollar. In the last few years, when house prices have again been increasing more rapidly than the long-term average, mortgage borrowing has not increased at all. In fact it has decreased.”

As a seller or a buyer, I do think it is prudent to closely watch the markets and prepare for a shift. But not a bubble. Today’s homeowners have equity. This is the major difference between today and 2006. Not only are sellers cautious about “cashing out,” but today’s buyer (with very few exceptions) is required to put at least 3-5 percent down when making a purchase, contrary to the pre-recession days when 100 percent financing options were prevalent.

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