We’ve all heard anecdotes of housing shortages and ridiculous all-cash offers.
The logical conclusion for many prognosticators is to call this yet another housing bubble.
I don’t think this is the case. Here’s why:
There are more credit-worthy borrowers. Yes, housing prices are rising at a rapid clip, but this is nothing like the subprime crisis. Just look at the credit scores for mortgage originations:
Loans are mostly being made to those with high credit scores and sizable down payments, the exact opposite of the subprime housing boom.
According to the Wall Street Journal, mortgage credit availability is near its lowest point since 2014. This means the banks pulling back on lending or households pulling back because they have been worried about the effects of the pandemic on their finances.
Either way, if more people eventually begin to take out loans this could actually lead to another leg higher in the housing market.
Supply and demand are fundamental.
Supply and demand are two of the most basic components of economic theory. Too much supply, and products become commodities with falling prices. Too much demand, and scarcity creates bidding wars which drive prices higher. This, in an overly simplistic way, describes what’s happened over the last decade in the housing market.
- Double-digit price hikes were widespread.
- Mutually accepted offers surge 40.6% compared to February.
- The drop in the number of active listings between now and last year is extraordinary.
- Statistics show a 55.9% decline in total active listings, shrinking from 9,418 at the end of March 2020 to 4,153 at month end March 2021.
- Seattle/Bellevue region now ranks #1 in technology office space leases, eclipsing San Francisco.
- Median prices system-wide surged 19.5% compared to a year ago.
In Western Washington where 5 million people call home and where we expect another 2 million people to relocate to in the next 10 years, we only have a total of just over 4,100 available homes from Olympia, through Seattle and the Eastside all the way up to Bellingham.
Other pressure may come from the migration of tech workers in our area, suggested Grady’s colleague, John Deely. He cited a new report from CBRE that shows the Seattle/Bellevue region now ranks #1 in technology office space leases, eclipsing San Francisco for the first time since 2013. “For the foreseeable future, buyers will need to bring their patience, a qualified and experienced broker, and a realistic outlook on the financial implications of this market as they search for homes.”
There is an incredible dearth in the supply of housing compared to the high demand leading to high housing costs. Yet while many openly express concerns and cry out for the need for affordable housing, many of those same voices push for building moratoriums to slow development.
In King County, the median prices for single family homes that sold last month in the Queen Anne/Magnolia area and every MLS map area on the Eastside topped $1 million.
Median prices system-wide surged 19.5% compared to a year ago. The median price for the 7,803 sales that closed during March was $548,199; a year ago it was $458,900. Prices rose in every county served by NWMLS, with seven counties reporting YOY price hikes of 25% or more.
Escalating prices are found throughout the Northwest MLS service area.
“Most of the rapid price increases follow the familiar trend of late where the I-5 and I-90 corridors outside of King County are showing exceptional levels of house price growth,” observed Gardner. “Median house price growth in Skagit County (27.3%), Kittitas County (43.8%), Thurston County (21.2%) and Whatcom County (20.8%) all outperformed King County at 14.7%,” he noted.
Kitsap, Snohomish, and Pierce counties also outgained King County’s price growth.
Competition for the limited supply of homes is intense in Kitsap County, according to Frank Wilson, Kitsap regional manager and branch managing broker at John L. Scott Real Estate, Poulsbo. Inventory in that county is down more than 64% from a year ago, and like many counties, pending sales are outgaining new listings.
There’s no question residential real estate in the United States is on fire. The latest Case-Shiller Index data showed an 11% year-over-year increase:
There has been a lot of discussion as to what will happen once the 2.3 million households currently in forbearance no longer have the protection of the program. Some assume there could potentially be millions of foreclosures ready to hit the market. However, there are four reasons that won’t happen.
Almost 50% Leave Forbearance Already Caught Up on Payments
According to the Mortgage Bankers Association (MBA), data through March 28 show that 48.9% of homeowners who have already left the program were current on their mortgage payments when they exited.
- 26.6% made their monthly payments during their forbearance period.
- 14.7% brought past due payments current.
- 7.6% paid off their loan in full.
This doesn’t mean that the over two million still in the plan will exit exactly the same way. It does, however, give us some insight into the possibilities.
The Banks Don’t Want the Houses Back
Banks have learned lessons from the crash of 2008. Lending institutions don’t want the headaches of managing foreclosed properties. This time, they’re working with homeowners to help them stay in their homes.
As an example, about 50% of all mortgages are backed by the Federal Housing Finance Agency (FHFA). In 2008, the FHFA offered 208,000 homeowners some form of Home Retention Action, which are options offered to a borrower who has the financial ability to enter a workout option and wants to stay in their home. Home retention options include temporary forbearances, repayment plans, loan modifications, or partial loan deferrals. These helped delinquent borrowers stay in their homes. Over the past year, the FHFA has offered that same protection to over one million homeowners.
Today, almost all lending institutions are working with their borrowers. The report from the MBA reveals that of those homeowners who have left forbearance,
- 35.5% have worked out a repayment plan with their lender.
- 26.5% were granted a loan deferral where a borrower does not have to pay the lender interest or principal on a loan for an agreed-to period of time.
- 9% were given a loan modification.
There Is No Political Will to Foreclose on These Households
The government also seems determined not to let individuals or families lose their homes. Bloomberg recently reported:
“Mortgage companies could face penalties if they don’t take steps to prevent a deluge of foreclosures that threatens to hit the housing market later this year, a U.S. regulator said. The Consumer Financial Protection Bureau (CFPB) warning is tied to forbearance relief that’s allowed millions of borrowers to delay their mortgage payments due to the pandemic…mortgage servicers should start reaching out to affected homeowners now to advise them on ways they can modify their loans.”
The CFPB is proposing a new set of guidelines to ensure people will be able to retain their homes. Here are the major points in the proposal:
- The proposed rule would provide a special pre-foreclosure review period that would generally prohibit servicers from starting foreclosure until after December 31, 2021.
- The proposed rule would permit servicers to offer certain streamlined loan modification options to borrowers with COVID-19-related hardships based on the evaluation of an incomplete application.
- The proposal rule wants temporary changes to certain required servicer communications to make sure borrowers receive key information about their options at the appropriate time.
A final decision is yet to be made, and some do question whether the CFPB has the power to delay foreclosures. The entire report can be found here: Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X.
If All Else Fails, Homeowners Will Sell Their Homes Before a Foreclosure
Homeowners have record levels of equity today. According to the latest CoreLogic Home Equity Report, the average equity of mortgaged homes is currently $204,000. In addition, 38% of homes do not have a mortgage, so the level of equity available to today’s homeowners is significant.
Just like the banks, homeowners learned a lesson from the housing crash too.
“In the same way that grandparents and great grandparents were shaped by the Great Depression, much of the public today remembers the 2006 mortgage meltdown and the foreclosures, unemployment, and bank failures it created. No one with any sense wants to repeat that experience…and it may explain why so much real estate equity remains mortgage-free.”
What does that mean to the forbearance situation? According to Black Knight:
“Just one in ten homeowners in forbearance has less than 10% equity in their home, typically the minimum necessary to be able to sell through traditional real estate channels to avoid foreclosure.”
The U.S. consumer balance sheet has improved.
Another reason this is nothing like the subprime crisis is the state of the U.S. consumer’s finances.
A combination of falling rates, some trepidation following the last crash and a healthy dose of stimulus payments mean the U.S. consumer is in better shape than they’ve ever been coming out of a recession:
By the end of 2007 there was more than $10 trillion in home equity but more than $9 trillion in mortgage debt. Now there is more than $21 trillion in home equity and $10 trillion in mortgage debt.
During the last bubble people with terrible credit scores took on too much debt that they couldn’t possibly hope to repay. That’s not the case this time.
Prices are rising for the right reason.
Millennials are now the biggest demographic in this country. The oldest millennial is turning 40 this year (that’s me). My generation put off buying a house much longer than our parent’s generation because more of us went to college or the financial crisis or we just didn’t want to grow up as fast.
Like all previous generations, millennials got older. They decided to settle down and buy a home even though it seemed like that would never happen following the Great Financial Crisis.
And a combination of the pandemic, remote work and low interest rates have all pushed even more people to start buying houses.
Just because prices are rising does not automatically make something a bubble.
Sometimes prices rise for good reasons. You may not like those reasons but that’s not the same thing as a speculative mania.
Could this turn into a bubble?
Sure, never underestimate the American desire to take things to excess.
But it’s not one right now.