Housing-Bubble Chances

An article based on research from a mortgage insurance company, who has a stake in the game (unlike economists).  The image above shows virtually no risk of prices falling in Southern California over the next two years.

H/T daytrip:

Housing bubble coming? According to one mortgage insurance company’s latest reports, there’s only a slim chance Southern California home prices will fall in the next two years.

Arch MI gauged the economic foundations of home values in 100 major metropolitan areas to determine local housing markets with “minimal” risk. Locally, Arch MI found solid performance among regional businesses and limited development of new homes as factors that should keep home prices firm.

Orange County was the riskiest market in the region — if having a 4 percent risk of a price decline in the coming two years is what you consider dicey. That compares with the county’s 28-year historical average of 25 percent chance of falling home values.

Arch MI noted Orange County’s home prices were up 12 percent in the two years ended in 2017 — only the 52nd highest among the 100 large metros studied. Per-capita homebuilding of 18 single-family homes per 10,000 residents — ranked No. 63 out of 100. Business output rose 5.2 percent last year, the 40th fastest growth nationally.

Los Angeles County had 2 percent risk of decline as 2018 started vs. a 1980-2018 average of 27 percent, according to Arch MI.

That score came as L.A. home prices surged 15.9 percent in two years — No. 32 biggest gain; per-capita homebuilding of 6 houses per 10,000 population was fourth slowest nationally; and business output rose 4.9 percent last year, No. 51 fastest.

In Riverside and San Bernardino counties, Arch MI found risk of home-price declines at 2 percent vs. a 28-year historical average of 25 percent.

Inland Empire home prices are up 15.6 percent in two years — No. 33 highest — as per-capita homebuilding of 26 per 10,000 — ranked No. 52 — while business output rose 5.5 percent last year, 29th fastest.

Arch MI doesn’t find much risk out of the region either: The nationwide risk of decline was 5 percent even after home prices rose 12.6 percent in two years. Yes, that was up from 2 percent a year ago.

“Housing markets in most cities are exceptionally strong due to a shortage of homes for sale,” Arch MI wrote. “Construction has lagged the growth in households and employment for nearly a decade. Even recent interest rate increases and higher taxes on some upper-income earners didn’t slow the market, as many had feared.”

Riskiest big markets, by Arch MI’s math? Texas and Florida!

No. 1 diciest was Houston (22 percent chance of price declines within two years) followed by San Antonio (20.3 percent); Tampa-St. Petersburg (19.2 percent); Cape Coral-Fort Myers (17.8 percent); Austin (17 percent); Fort Lauderdale (16.9 percent); and Miami (16.4 percent).

“Housing markets aren’t likely to cool until the economy slows, either from substantially higher interest rates or an unexpected economic shock,” Arch MI wrote. “Short of a war or stock market crash, housing markets could continue to surprise on the upside over the next few years.”

Link to Article

Mortgage-Rate History

Mortgage rates settled down the last two days, but the damage was done – we’re above 4.50% (no points) now for 30-year loans.  You’d think that some day the higher rates will have an impact on the demand for housing, but for now, sellers are confident that the prime selling season will be fruitful.  Heck, maybe there will be some sellers who will consider a lower offer?

Of course, rates are still pretty favorable, historically:

San Diego Bubble Meter

The local NSA Case-Shiller set a new record this week too. From the U-T:

The San Diego County median home price soared to its highest point ever, $550,000, in March, said real estate tracker CoreLogic. Home prices increased 6.8 percent in a year, which experts attribute to a lack of homes for sale and a strong economy. The previous home peak was $545,000 in June. So that has led us to ask our panel of experts the following question this week.

Question: Are we approaching housing bubble territory?

Phil Blair, Manpower

NO: As high as our housing prices are now they seem reasonable when compared to the Silicon Valley and Seattle markets. San Diegans are struggling to get into the housing market but those in it are riding the prices up and the for-sale inventory continues to stay very low, meaning houses are selling at these current prices.

Kelly Cunningham, San Diego Institute for Economic Research

YES: Approaching bubble territory, but not yet reaching peak of price. The current median price of homes sold is “only” 6.7 times San Diego’s median household income. This is the same ratio reached in 2004, 1½ years before the ratio peaked at 8 times San Diego’s median household income at end of 2005. The primary reason prices are rising is demand for San Diego housing still far exceeds supply at the same time home construction lags.
David Ely, San Diego State University

NO: Rising interest rates will slow the pace of home price appreciation. However, conditions do not seem favorable for a collapse in home prices in the near term. Relative to the housing needs of the area, the supply of housing has been growing slowly. And, mortgage lending practices are not as relaxed as they were a decade ago so a fall in home prices is less likely to arise from an increase in foreclosures.

Gina Champion-Cain, American National Investments

NO: Even as interest rates increase, demand remains high and public policy designed to prevent creation of housing stock will ensure inadequate supply. These conditions will breed appreciation but not a bubble. Bubbles require rampant speculation fueled by irresponsible lending, neither of these conditions are present. The absence of “stated income” loans has shifted the under qualified consumer to rental living which removes those previously vulnerable mortgages from the market further reducing bubble risk.

Alan Gin, University of San Diego

NO: Housing prices are high and that is causing an affordability problem. But the increase is the result of economic fundamentals, not speculation. The local economy, particularly the labor market, is strong, which is increasing the demand for housing. The supply is much lower than in the last bubble, with residential units authorized by building permits at only about 10,000 a year, compared to 15,000+ in the mid-2000s. The only worry is a rise in interest rates, which would dampen demand.

James Hamilton, UC San Diego

NO: While San Diego house prices are back to the peak in 2006, the median income in San Diego today is 27 percent higher. In terms of the ratio of house prices to income, we’re back to 2002 values. Higher incomes and lower interest rates help keep homes affordable, and I don’t see the speculative component that we had in 2006. But higher interest rates and changes in tax law could bring home prices down.

Gary London, London Group of Realty Advisors

NO: The housing market may be peaking again after 10 years of buildup, but it is not bubbling. In fact, lender requirements are very stringent, eliminating the prior crash causation factors. It is housing scarcity that is causing the price increases: We are building at the rate of less than one-half the housing units required in the region, creating a shortage that is expected to reach 170,000 units by 2030. Add to that the reluctance of sellers to sell, resulting in very low listing levels, and the millennial demand for the almost extinct single-family home, and you have a perpetual shortage and bid up of pricing.

Norm Miller, University of San Diego

NO: While we are certainly unaffordable for many households that does not equate to a bubble, which by definition will collapse. Naïve analysts look only at price/income ratios, but we learned last cycle that the key to the collapse was the use of others people’s money via high loan-to-value (LTV) mortgages and a large percentage with second mortgages underwritten with loose standards. Currently, there is enough equity to suggest no pending collapse of the market. If significant subprime lenders enter the market again or we loosen up standards or interest rates jump 100 basis points, then that will put us in bubble land.

Jamie Moraga, IntelliSolutions

NO: Currently the demand is strong for homes in San Diego and our supply is low. Most homes don’t even stay on the market for a few days before they are in escrow. Prices are driven by both economic and income growth in addition to the ease of mortgage loans. Should we see an economic downturn and unemployment and interest rates start to rise, then that’s usually when we would see more delinquencies, foreclosures, and homebuyers deciding to hold off on making a home purchase.

Austin Neudecker, Rev

YES:. I am no real estate expert, but any market at a peak gives me pause for consideration. I would guess that low-interest rates are a contributing factor, and as the rates increase, prices may see an impact. Also, with recent layoffs (e.g. Qualcomm), San Diego needs to attract/build more companies with high-paid workers, yet we are still at historically low (official) unemployment (which is increasingly misleading as a metric).

Bob Rauch, R.A. Rauch & Associates

NO: A housing bubble is when housing prices, fueled by demand (any home buyer would be increasing demand by one house), speculation, and market exuberance, “run up.” At that time, speculators enter the market and increase demand for housing. If we believe that demand will decrease or stagnate, or if lots of new housing supply is built, then there could be a sharp drop in prices.

Lynn Reaser, Point Loma Nazarene University

NO: San Diego home prices are only now finally recovering to the prior highs reached a dozen years ago in early 2006. Demand is strong, powered by expanding jobs, incomes, and wealth. New supply has been inadequate, constrained by regulatory costs and other factors despite some positive steps by policymakers. As a result, San Diego has seen a net out-migration to other parts of the country of about 15,000 residents and home prices continue to climb.

John Sarkisian, Motion Ventures

NO: There is a shortage of housing that will continue to drive the cost of housing higher in the near future. Unlike the last cycle, housing prices are being driven by fundamental economics and not by creative financing products. It has been 10 years and prices are not significantly higher than before the last correction.

Chris Van Gorder, Scripps Health

NO: Bubbles are a function of speculation and reckless lending practices and I see no evidence of either in the current housing market. It is the lack of supply that has driven home prices higher, due primarily to the scarcity of land and a burdensome regulatory environment. These are issues that will not be resolved in the near term. That said, the impact of the recent tax reform bill and rising mortgage rates will likely slow the rate home price increases.

Link to U-T Article

Freddie Mac To Compete With FHA

Freddie Mac’s underwriting also allows self-employed buyers to submit tax returns for one year only, instead of the customary two years’ tax returns.  I’m not sure if they will do that on this new program?

It’s been more than three years since Freddie Mac rolled out a conventional mortgage that only required a 3% down payment for certain borrowers.

But now, Freddie Mac is about to supercharge its 3% down program and launch a widespread expansion of the offering.

Freddie Mac announced Thursday that it is rolling out a new conventional 3% down payment option for qualified first-time homebuyers. What makes this program different is that there are no geographic or income restrictions.

The new program, which is called HomeOne, puts Freddie Mac in direct competition for mortgage business with the Federal Housing Administration, which also only requires 3% down on some mortgages.


More on Home Staging

From Realtor Magazine:

Real estate shopping requires a buyer’s imagination. As a real estate professional, you want open-house guests to be able to picture the household as if they’ve already moved into the property. That’s why staging can make all the difference in the world, especially for an empty house, says Desare Kohn-Laski, broker-owner of Skye Louis Realty in Coconut Creek, Fla.

If you’re having a tough time convincing sellers that staging a vacant home is worth it, here are four compelling reasons that Kohn-Laski shares with her clients.

  1. Staging plants the idea that a home could be theirs. Buyers will make a good offer at first sight if the mood of a property says, “This could be your next home.” Whether it’s a townhome, condo, or single-family property, Kohn-Laski says it’s worth it to present a home in the best, most inviting light possible.
  2. Staging puts room dimensions into perspective. This point is important for both listing photos and for showings. “Without anything in it, a buyer will be clueless in differentiating the size of a room even if you give its area measurement,” Kohn-Laski says. “But with some furnishings in it, there will be reference points to at least give them an estimate that this room is actually larger than the other one.”
  3. Staging emphasizes the positive aspects of a home. Imperfections in walls, floor bumps, missing details in built-in cabinets, and small closets tend to get more attention when there’s nothing else to look at in a vacant home. It’s tougher for buyers to imagine the view from the couch, the dinners at the dining room table, or the cookouts on the back deck.
  4. Staging curbs negative presumptions. According to seller’s agents, Kohn-Laski says, an empty house typically gives an idea of financial crisis, divorce, and personal problems. Staging dissuades negative assumptions about the sellers, she adds.
Link to Article Bob Vila 10 Staging Tips

My thoughts:

Staging a home with attractive furniture and artwork helps buyers envision the possibilities, and give a boost to the online photos, which stimulates more interest.  It’s one of the best things to ever happen to home sales:

  1. Staging enables resale homes to imitate the model-home look.
  2. For buyers who wanted new, a staged resale home might be close enough.
  3. A staged home compares more favorably to a non-staged home, and can compete with new homes.
  4. HGTV shows have trained buyers to expect staging.

For those who want to ensure a good first impression, staging is an ideal option.

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