4 Reasons Why Today’s Housing Market is NOT 2006 All Over Again

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With home prices rising again this year, some are concerned that we may be repeating the 2006 housing bubble that caused families so much pain when it collapsed. Today’s market is quite different than the bubble market of twelve years ago. There are four key metrics that explain why:

  1. Home Prices
  2. Mortgage Standards
  3. Mortgage Debt
  4. Housing Affordability

1. HOME PRICES

There is no doubt that home prices have reached 2006 levels in many markets across the country. However, after more than a decade, home prices should be much higher based on inflation alone.

Frank Nothaft is the Chief Economist for CoreLogic (which compiles some of the best data on past, current, and future home prices). Nothaft recently explained:

“Even though CoreLogic’s national home price index 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.” (emphasis added)

2. MORTGAGE STANDARDS

Some are concerned that banks are once again easing lending standards to a level similar to the one that helped create the last housing bubble. However, there is proof that today’s standards are nowhere near as lenient as they were leading up to the crash.

The Urban Institute’s Housing Finance Policy Center issues a Housing Credit Availability Index(HCAI). According to the Urban Institute:

“The HCAI measures the percentage of home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.”

The graph below reveals that standards today are much tighter on a borrower’s credit situation and have all but eliminated the riskiest loan products.

4 Reasons Why Today’s Housing Market is NOT 2006 All Over Again | MyKCM

3. MORTGAGE DEBT

Back in 2006, many homeowners mistakenly used their homes as ATMs by withdrawing their equity and spending it with no concern for the ramifications. They overloaded themselves with mortgage debt that they couldn’t (or wouldn’t) repay when prices crashed. That is not occurring today.

The best indicator of mortgage debt is the Federal Reserve Board’s household Debt Service Ratio for mortgages, which calculates mortgage debt as a percentage of disposable personal income.

At the height of the bubble market a decade ago, the ratio stood at 7.21%. That meant over 7% of disposable personal income was being spent on mortgage payments. Today, the ratio stands at 4.48% – the lowest level in 38 years!

4. HOUSING AFFORDABILITY

With both house prices and mortgage rates on the rise, there is concern that many buyers may no longer be able to afford a home. However, when we look at the Housing Affordability Indexreleased by the National Association of Realtors, homes are more affordable now than at any other time since 1985 (except for when prices crashed after the bubble popped in 2008).

4 Reasons Why Today’s Housing Market is NOT 2006 All Over Again | MyKCM

Bottom Line

After using four key housing metrics to compare today to 2006, we can see that the current market is not anything like the bubble market.

A New Housing Bubble Forming…Not Before 2024!

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A recent report by CoreLogic revealed that U.S. home values appreciated by more than 37% over the last five years. Some are concerned that this is evidence we may be on the verge of another housing “boom & bust” like the one we experienced from 2006-2008.

Recently, several housing experts weighed in on the subject to alleviate these fears.

Sean Becketti, Freddie Mac Chief Economist

 “The evidence indicates there currently is no house price bubble in the U.S., despite the rapid increase of house prices over the last five years.”

Edward Golding, a Senior Fellow at the Urban Institute’s Housing Finance Policy Center

 “There is not likely to be a national bubble in the way that we saw the first decade of the century.”

Christopher Thornberg, Partner at Beacon Economics

 “There is no direct or indirect sign of any kind of bubble.”

Bill McBride, Calculated Risk

 “I wouldn’t call house prices a bubble.”

David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices

 “Housing is not repeating the bubble period of 2000-2006.”

A recent article by Teo Nicolais, a real estate entrepreneur who teaches courses on real estate principles, markets, and finance at Harvard Extension School concluded that the next housing bubble may not occur until 2024.

The article, How to Use Real Estate Trends to Predict the Next Housing Bubble, looks at previous peaks in real estate values going all the way back to 1818. Nicolais uses the research of several economists. The article details the four phases of a real estate cycle and what defines each phase.

Nicolais concluded his article by saying:

“Those who study the financial crisis of 2008 will (we hope) always be weary of the next major crash. If George, Harrison, and Foldvary are right, however, that won’t happen until after the next peak around 2024. 

Between now and then, aside from the occasional slow down and inevitable market hiccups, the real estate industry is likely to enjoy a long period of expansion.”

Bottom Line

The reason for the price appreciation we are seeing is an imbalance between supply and demand for housing. This has created a natural increase in values, not a bubble in prices.

A Housing Bubble? Industry Experts Say NO!

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With residential home prices continuing to appreciate at levels above historic norms, some are questioning if we are heading toward another housing bubble (and subsequent burst) like the one we experienced in 2006-2008.

Recently, five housing experts weighed in on the question.

Rick Sharga, Executive VP at Ten-X:

“We’re definitely not in a bubble.”

“We have a handful of markets that are frothy and probably have hit an affordability wall of sorts but…while prices nominally have surpassed the 2006 peak, we’re not talking about 2006 dollars.”

Christopher Thornberg, Partner at Beacon Economics:

“There is no direct or indirect sign of any kind of bubble.”

“Steady as she goes. Prices continue to rise. Sales roughly flat.…Overall this market is in an almost boring place.”

Bill McBride, Calculated Risk:

“I wouldn’t call house prices a bubble.”

“So prices may be a little overvalued, but there is little speculation and I don’t expect house prices to decline nationally like during the bust.”

David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices:

“Housing is not repeating the bubble period of 2000-2006.”

“…price increases vary unlike the earlier period when rising prices were almost universal; the number of homes sold annually is 20% less today than in the earlier period and the months’ supply is declining, not surging.”

Bing Bai & Edward Golding, Urban Institute:

“We are not in a bubble and nowhere near the situation preceding the 2008 housing crisis.”

“Despite recent increases, house prices remain affordable by historical standards, suggesting that home prices are tracking a broader economic expansion.”

58% of Homeowners See a Drop in Home Values Coming

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According to the recently released Modern Homebuyer Survey from ValueInsured, 58 percent of homeowners think there will be a “housing bubble and price correction” within the next 2 years.

After what transpired just ten years ago, we can understand the concern Americans have about the current increase in home prices. However, this market has very little in common with what happened last decade.

The two major causes of the housing crash were:

  1. A vast oversupply of housing inventory caused by home builders building at a pace that far exceeded historical norms.
  2. Lending standards that were so relaxed that unqualified buyers could easily obtain financing thus enabling them to purchase a home.

Today, housing inventory is at a 20-year low with new construction starts well below historic norms and financing a home is anything but simple in the current mortgage environment. The elements that precipitated the housing crash a decade ago do not exist in today’s real estate market.

The current increase in home prices is the result of a standard economic equation: when demand is high and supply is low, prices rise.

If you are one of the 58% of homeowners who are concerned about home values depreciating over the next two years and are hesitant to move up to the home of your dreams, take comfort in the latest Home Price Expectation Survey.

Once a quarter, a nationwide panel of over one hundred economists, real estate experts and investment & market strategists are surveyed and asked to project home values over the next five years. The experts predicted that houses would continue to appreciate through the balance of this year and in 2018, 2019, 2020 and 2021. They do expect lower levels of appreciationduring these years than we have experienced over the last five years but do not call for a decrease in values ( depreciation) in any of the years mentioned.

Bottom Line

If you currently own a home and are thinking of moving-up to the home your family dreams about, don’t let the fear of another housing bubble get in the way as this housing market in no way resembles the market of a decade ago.

As a working agent in the Orlando area of Central Florida, I do NOT see a drop in prices soon. In fact, I only see an increase in high demand areas. Call me if you want to discuss my observations at 407-925-7721.

The Rich Are Different

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The Changing Luxury Market

I am a specialist in luxury homes and marketing luxury goods to clients throughout the world. This current economic climate though has changed my opinion of the definition of luxury. Times change, people change and luxury has changed.

Luxury clients were once an elite group of individuals who were fairly obvious to even the most amateur of sales executives. But luxury elite status has dimmed somewhat as firstly, many people are now able to afford luxury goods and secondly, many luxury clients remain cautious after the real estate and financial meltdown.

Today’s luxury homeowner may look wealthy (expensive diamonds, cars, art) but underneath their demeanor is a homeowner who is living month to month and wondering how to maintain appearances. It’s a fragile world and frankly, they are ill prepared.

Today’s TRUE luxury client often looks different and buys based on knowledge and experience. The smart ones are people who have not fallen prey to every excess on the market, purchased a bucket load of baubles and continue to drive the latest most expensive cars. I am finding many luxury clients asking me to assist them as they work through a financial downturn they never anticipated or saved for.

It’s a scary world. Our next election means a great deal for our economy. As I have said in the past, home sales equal a strong economy.

Today’s luxury client could mean dreadlocks and diamonds. In other words – today’s luxury is not the obvious…in fact, it’s the reverse.

Today’s luxury buyer has invested well and with discretion. They may may drive a Ford and not have a multi-million dollar medieval castle. They wear jeans and Nikes. The high-end buyer is unique and totally in tune with the market.

80% of today’s luxury buyers are tech savvy and researches every purchase. And most importantly, today’s luxury customer rarely buys on impulse. Long term investments are the rule with multiple properties instead of one show home. It’s actually an interesting turn of events.

I am reminded of my grandmother who came from great wealth but lived her later years in a charming bungalow of about 970 square feet. She mowed her own yard in knee highs and pearls. She drank her tea on fine china in a tiny kitchen. That’s somewhat representative of today’s luxury.

They luxury buyers are different, they act different and they have a certain rule for living that is going to redefine the future. They may not have a million dollar home but their home will be chic and charming. Gaudy is out and tasteful and charming is in. Small is the new big. This is going to be amazing to watch the old world appeal of outlandish display transformed by a new era of discrete buyers.

To quote F. Scott Fitzgerald, “The rich are different…”

Most Experts Agree: There is No Housing Bubble

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There is no doubt that home prices in the vast majority of housing markets across the country are continuing to increase on a month over month basis. The following map (based on data from the latest CoreLogic pricing report) reveals the appreciation level by state:

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These increases in value have caused some to be concerned about a new price bubble forming in residential real estate. Here are quotes from many of the most respected voices in the housing industry regarding the issue:

Nick Timiraos, reporter at the Wall Street Journal:
“Predictions of a new national home price bubble look unfounded for now, according to data.”

Michael Fratantoni, Chief Economist, the Mortgage Bankers Association:
“I don’t really see it as a bubble.”

Jack M. Guttentag, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania:
“My view is that we are a long way from another house price bubble.”

Rajeev Dhawan, Director of Economic Forecasting Center at J. Mack Robinson College of Business, Georgia State University:
“To have a bubble, you need to have construction rates higher than the perceived demand, which is what happened in 2003 to 2007. Right now, however, we have the reverse of that.”

Victor Calanog, Chief Economist, Reis:
“The housing market has yet to show evidence of systematic runaway asset price inflation characterized by home prices rising much faster than household income.”

David M. Blitzer, Chairman of the Index Committee for S&P Dow Jones:
“I would describe this as a rebound in home prices, not a bubble and not a reason to be fearful.”

Andrew Nelson, US Chief Economist, Colliers International:
“I don’t think there is a housing bubble.”

George Raitu, Director, Quantitative & Commercial Research, NAR:
“We do not consider the current market conditions to present a bubble.”

Christopher Thornberg, Founding Partner, Beacon Economics:
“The housing market is far from overheated.”

So why have prices been increasing?

Today, there is a gap between supply (number of houses on the market) and demand (the number of buyers looking for a new home). In any market, this would cause values to increase. Here are some experts’ comments on this issue:

Jonathan Smoke, realtor.com Chief Economist:
“So does that mean we’re in a bubble? Nope, that’s just what happens when demand increases faster than supply.”

Robert Bach, Director of Research – Americas, Newmark Grubb Knight Frank:
“I don’t think the housing market is overheated based on demand and supply fundamentals.”

Mark Dotzour, Chief Economist, Real Estate Center, Texas A&M University:
“We are not in a housing bubble. We are in a situation where demand for houses is much higher than supply.”

Calvin Schnure, SVP of Research & Economic Analysis, NAREIT:
“Given all the demand and little supply the residential market is FAR from overheated.”

Bottom Line

Currently, there is an imbalance between supply and demand for housing. This has created a natural increase in values not a bubble in prices.