No, We are Not in a Bubble
In the summer of 2005, my soon-to-husband drove his 1995 Mazda MX-6 more than 2,000 miles across the country to his first duty station: Hill Air Force base in Utah. A few weeks later, I flew out to meet him. After much effort, I finally secured a job in Salt Lake City -- in the legal department of a mortgage company. Destined for law school (or so I thought), I was excited for my $11/hour job that had "legal" in the title. I was on my way.
Every day, I copied and faxed documents with names like "Countrywide" and "IndyMac" on them (just a few of the top mortgage originators during the bubble that don't exist today). Just before Christmas 2005, the company laid off a quarter of its employees, and then they gave everyone left over a Christmas card with a $100 bill inside. Little did I know, the housing market had come to a screeching halt. A few months after the big lay off, my department was let go as well. It was 2006.
In 2006, some big banks had seen the end was coming, and began betting against the housing market. By 2009, the market had hit rock bottom; In the DC Metro, home sales had decreased by 40% compared to the peak in 2005. The market was flooded with inventory as homeowners rushed to sell homes they could no longer afford. With the enormous drop in demand and the jump in homes on the market, prices dropped almost 15% in 2009. And, that's exactly when yours truly got into real estate.....
Housing experts are everywhere! Every now and then I'll be dipping my pita bread into the little dish of olive oil atop a white tablecloth over the table of one of our local restaurants when I hear someone mention real estate. Of course, like all impassioned agents, my ears perk up. "Yea, definitely in a housing bubble. We're headed for a crash, for sure." Even in DC, where people have NPR, C-Span, Fox and MSNBC going while they drive and simultaneously read the paper, they get it wrong -- a lot.
No, we are not in a bubble.
But, it feels like a bubble! Yes, for the last 9 years, home prices have been appreciating. Yes, multiple offers situations and homes selling for over asking price happens quite a bit. But, let me let you in on a few secrets:
1. Demand has been tempered by prices, more student loan debt, people waiting until later in life to buy property, and homeowners staying put for longer.
2. Job growth is outpacing new housing stock.
3. If a home sells for significantly more than asking price -- make no doubt: the home was listed significantly below market value to start with.
Now, let's compare appreciation rates in the DC Metro between 2001 and 2005 and now: In 2002, prices rose 14% over the previous year; in 2003, they were up 15%, in 2004, up 20%, and 21% in 2005. Now, compare that to the last few years, where the average appreciation was around 7% in the city and less in the suburbs.
Since the crisis, a lot has changed. Restrictions and new laws aimed at creating transparency, new standards, and more protections for consumers were brought upon lenders and federal financial and regulatory institutions. Risky ARMs, stated-income loans, and fraudulent practices were rampant before the crash. Now, all are far more the exception.
1. Since banks are issuing 21% fewer mortgages compared to pre-crisis averages, borrowers need higher incomes and better credit to get a mortgage.
2. The median FICO score for an originated mortgage rose from 707 in late 2006 to 754 today. The scores on the bottom decile of mortgage borrowers rose even more dramatically from 578 to 648.
3. Although the current Loan-to-value on mortgaged homes remains above historical averages, Americans continue to manage mortgage debt well. Current homeowners have mortgage payments that make up an average of just 16.5% of their annual household income.
4. Mortgage delinquency rates stayed constant at their all-time low (1.24%). This low delinquency rate came following 30 straight quarters of falling delinquency, and are well below the 2009 high of 8.35% delinquency
5. Today, delinquency rates have fully returned to their pre-crisis lows, and can be expected to stay low until the next economic recession.
So, what can we really expect over the next few years? As interest rates continue to rise - right alongside healthy appreciation, buyer demand will slow and homes will sit on the market longer - creating more inventory. A breath of fresh air for buyers. Within a few years, we'll start to see more of a balanced market, where buyers and sellers have about equal leverage. It's coming. Probably not this year, maybe not next year, but soon. Nothing to be worried about - it's simply a shift in the market. I'm confident in the knowledge that buying a home remains one of the most stable investments available; pride of homeownership and knowing that unlike rent your payment, your mortgage isn't going to go up. Finally, it's a fantastic way to build wealth.