We have been seeing prices rising for the last few years at a healthy pace. There are some people that think we are on the brink of a housing bubble, however I am here to give you several reasons why we are not. If you look at the data and the current economic situation, you’ll quickly realize how different the current environment is from where we were in 2008.
1- Housing is more affordable today than it has been over the last 20 years! Most of the country has lower monthly housing payments relative to median income today than during the previous twenty years. Today the national payment to income ratio is at 22.8%, meaning that on average, homeowners are paying 22.8% of their gross income to cover their monthly housing expenses (principle, interest, taxes, and insurance).
Interest rates today are still well below historical averages (the 30 year average rate going back to 1965 is approximately 7.75%)
Median income has been increasing over the last few years
2- The strong U.S. economy is turning out well qualified buyers. To buy a home, you need income and for most of us, that means a job. Since the Great Recession, the U.S. has been consistently creating jobs, over the last twelve months 2.28 million new jobs have been created throughout the country. You have to have a well-paying job to afford a home in most places. The data on earnings shows that all those new jobs are forcing employers to compete for talent by increasing hourly earnings.
Existing home inventory levels are low relative to the number of qualified buyers. We have 2.28 million new jobs, however there has only been 1.16M new dwelling building permits pulled. Home builders cannot build fast enough to keep up with the demand coming from new job creation. Until builders catch up, we will have greater demand for housing that we have supply, and home prices should continue to rise in most areas of the country, especially those areas with quickly expanding economies.
4- Mortgage credit standards are near an all-time high. It’s no secret the Mortgage Meltdown and the ensuing Great Recession were fueled by cheap, easy credit, with little if any consideration to the borrower’s ability to realistically make on time payments and pay the loan down over time.
That didn’t work out so well…Today however, underwriting standards are very tight. Clients need solid credit, documented two year history of income, a reasonable assessment of the likeliness of that income continuing, and down payment funds must be verified as the clients’ own.
5- Mortgage loan delinquencies are near record lows due to 10 years of incredibly tight mortgage lending standards, mortgage loans are performing incredibly well. Delinquencies and defaults are near an all-time low, which speaks to the overall strength of the real estate and mortgage market.
6- Americans are sitting in $5.42 trillion of tappable equity. One of the things that led to the mortgage meltdown and Great Recession was that Americans were using their homes like cash registers, constantly pulling out cash every few years, and far too few had substantial equity in their homes when the economy slowed.
Tappable equity is defined as the amount of equity between your current mortgage balance and eighty percent of the current value of your home. For example, if you owe three hundred thousand on your home and your home is worth five hundred thousand, you would have one hundred thousand of tappable equity. This is equity that is easily accessible with a HELOC (home equity line of credit) or a new first mortgage.
7- The luxury home market has not seen the run up in prices that starter and mid-level homes have. The housing recovery began at the starter home level and was aided by significant first time homebuyer tax credits and record low interest rates. As demand grew from the bottom up so has the rate of real estate appreciation that has not been balanced since the recovery began.
CoreLogic reports low end homes have appreciated by fifty five percent, while high end homes have only appreciated by thirty percent since 2013. It is unusual that low end homes would appreciate eighty three percent greater than high end homes; it is a trend that will not continue forever.
8- Rising interest rates are not likely to kill the real estate market. The Federal Reserve conducted the largest monetary policy experiment in history, commonly known as the QE (quantitative easing) program, and resulting in the U.S. central bank holding a massive $4.5 trillion portfolio of U.S. Treasuries and mortgage bonds. QE began in 2008 and officially concluded in 2014; however the income from the QE investments continued to be rolled into new bond purchases until late 2017.
9- Homeownership rates are beginning to turn higher. After more than a decade of declining homeownership rates, owning the real estate Americans inhabit is regaining its allure.
10- Recession does not equal a housing crisis! Our country has experienced economic growth for almost a decade. Economic expansion cannot happen forever and the economy will need to take a breather at some point.
11- Buying your dream home is not about money – it’s about enjoying your lifestyle! My last word of advice as you consider buying your dream home, the one that will fit your lifestyle and family for decades to come. Do not overspend! Do not put yourself in a situation where your home turns into a financial burden that detracts from your lifestyle.
Keep in mind that whether you are interested in buying a home or selling a home, a Realtor should represent you– this person is working for your benefit and will help you navigate through the buying or selling process. I have thirteen years in New Home Sales and sixteen years in General Real Estate sales!
Thanks and make it a terrific day…………Robin