The Housing Bubble

A weekend topic starting with MarketWatch. “As interest rates rise, fewer households refinance their mortgages. And the refinances that do get done are often very different than those initiated during low-rate periods. ‘When rates are low, the primary goal of refinancing is to reduce the monthly payment,’ wrote researchers for the Urban Institute. ‘But when rates are high, borrowers have no incentive to refinance for rate reasons. Those who still refinance tend to be driven more by their desire to cash out.’”

“As of the fourth quarter of last year, the share of all refinances that were cash-outs rose to the highest since 2008, according to Freddie Mac data. The Urban Institute and others have shown that refinancing activity, not home buying, was responsible for inflating the housing bubble.”

From US News & World Report. “While interest-only loans disappeared from the mortgage marketplace for a few years, they’ve recently had a minor comeback. Interest-only loans offer flexibility for people who want to use their cash for other investments throughout the year, says Jennifer Beeston, branch manager of mortgage lending for Guaranteed Rate in Santa Rosa, California. For example, you can trade stocks with the cash you would have paid toward the principal on a conventional mortgage and then use the profits to pay some of the principal in a lump sum.”

“‘Another profile of a good candidate for an interest-only loan is someone who moves around and relocates a lot but wants to get into the housing market in a location where values are rising,’ says Beeston. ‘It could be better than renting, as long as values are rising.’”

From Eurasian Review. “The mortgage market again faces the risk of a meltdown that could endanger the U.S. economy, warn two Berkeley Haas professors in a paper co-authored by Federal Reserve economists. The threat reflects a boom in nonbank mortgage companies, a category of independent lenders that are more lightly regulated and more financially fragile than banks–and which now originate half of all US home mortgages.”

“‘If these firms go out of business, the mortgage market shuts down, and that has dire implications for the overall health of the economy,’ said Richard Stanton, professor of finance and Kingsford Capital Management Chair in Business at Haas. Stanton authored the Brookings paper, ‘Liquidity Crises in the Mortgage Market,’ with Nancy Wallace, chair of the Haas Real Estate Group. You Suk Kim, Steven M. Laufer, and Karen Pence of the Federal Reserve Board were coauthors.”

“Independent mortgage companies have little capital of their own and scant access to cash in an emergency. They have come to rely on a type of short-term funding known as warehouse lines of credit, usually provided by larger commercial and investments banks. It’s a murky area since most nonbank lenders are private companies which are not required to disclose their financial structures, so Stanton and Wallace’s paper provides the first public tabulation of the scale of this warehouse lending. They calculated that there was a $34 billion commitment on warehouse loans at the end of 2016, up from $17 billion at the end of 2013. That translates to about $1 trillion in short-term ‘warehouse loans’ funded over the course of a year.”

“If rising interest rates were to choke off the mortgage refinance market, if an economic slowdown prompted more homeowners to default, or if the banks that extend credit to mortgage lenders cut them off, many of these companies would find themselves in trouble with no way out. ‘There is great fragility. These lenders could disappear from the map,’ Stanton noted.”

From Inman News. “January’s S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index shows that home price growth is unlikely to slow down anytime soon — January 2018’s national index comes in at 196.31, a 6.2 percent year-over-year. Chairman of the index committee David M. Blitzer noted there are no ‘weak spots’ when it comes to individual markets, and the home price index continues to outpace the national GDP.”

From AZ Family in Arizona. “Do you remember the housing bubble? It pretty much crippled our economy and forced countless families out of their home. Well, fast-forward 10 years and the real estate market is back in full force and thriving. The Phoenix real estate market has officially taken off. ‘In the last five years in Arizona alone, we’ve had a 39 percent increase in value in property,’ said Nate Martinez, who is a Valley real estate agent for more than 30 years.”

“It’s a sellers’ market. It also means if you’re a buyer, you’ll have to be prepared before someone else gets the house you want. ‘They need to have their loan done. They need to know exactly what they’re looking for in a house. They need to be prepared that in a multiple offer, they may have to pay above full price to get the house,’ he said.”

From the Wilsonville Spokesman in Oregon. “Shortly before the housing bubble burst, the stock market crashed and the worldwide economy went into a deep recession, the median home price in Wilsonville was $406,300, according to Zillow. That number cratered to $379,300 by 2008 and $295,500 by 2010. But housing prices have slowly trended upward since 2012. And in 2017, Wilsonville’s average home sales price surpassed the 2007 mark for the first time, according to Zillow — reaching $434,850 in 2017 while Realtor.com calculated the figure at $433,483.”

“Real estate broker Debi Laue says low interest rates have facilitated the rise in prices. ‘There was a lot of dead years where people wanted to buy and couldn’t, but with low interest rates and affordability, the market has cut loose,’ she said.”

“But the uptick in real estate prices won’t last forever. And Andy Green of Green Group Real Estate has been waiting for an eventual downturn. ‘We’re long overdue for a market correction,’ Green said. Laue agrees. ‘I think the market will correct. It always does. If interest rates go up and prices go up and become unaffordable, they’ll come down and be affordable,’ she said.”

The Lewiston Tribune in Idaho. “In Canyon County, where population and economic growth ordinarily is not just approved of but eagerly sought, organizations such as the Canyon County Agricultural Planning Area Committee usually start with an easily accepted point of view: Mo’ growth, mo’ better. But not so much at their last meeting in Caldwell. A report in the Idaho Press-Tribune said that ‘Some attendees expressed concern about Meridian development spilling over into the farmland in North Nampa. One Nampa farmer told staff that development was happening in his area quicker than he had ever seen.’”

“One spoke of a ‘wall of houses’ encroaching from Ada County into Canyon. Another farmer replied, ‘It’s not a wall of houses. It’s a tidal wave.’”

“Also last week, a group of mostly Canyon Countians spoke similarly at the new, small city of Star, where a local comprehensive plan change might lead to turning 5,000 rural acres into medium- or low-density housing.”

“A day after touring some of the huge fields of new houses in western Ada County - the big new crop in that area - I had coffee with an old friend who lived for many years on the East Coast, a former Idahoan moving back to his old home area. But not exactly in his old town of Boise; he had to settle for several miles away from it. He intended moving back there. But it didn’t work out because he could find no houses (at least, suitable) in Boise for near what he could pay - and that’s after selling his comparable place in an eastern state metro area.”

“Houses with a price tag less than $200,000 are rare birds now in Boise, and hard to find nearby. If you’re an average income homebuyer, and your income is below the executive level, you’re going to have a hard time finding a place there.”

“What we’re seeing now may be another housing bubble; in fact, probably it is. But for now, housing is in too limited supply in the Boise region, and in other regions around Idaho - in Kootenai County, in Twin Falls and elsewhere. If you can afford high-end digs, you have ample choices.”