"Housing Boom Stokes Fear of a Bubble" says Scotsman's Guide, the leading industry publication for mortgage professionals. It is intellectually lazy and somewhat disappointing that trained economists will throw the word bubble around simply to get attention for taking a position and because home prices have reached their all-time peak. So they hit their all-time peak again... so what? That says nothing. While it may be notable from a psychological standpoint, it's a meaningless fact. The variables that investors look at are the direction of interest rates and the low monthly payment that lower interest rates provide. They look at the presence of rising incomes, job growth, population growth, etc. These are the real keys to understanding why home prices might be going up. But bubble proponents will cite million dollar median home prices in San Jose and Brooklyn. So what? Tech millionaires are going to compete for housing. They say that rates are going up soon and the economy is set to slow. Maybe. But if the economy slows, rates will come right back down. So the only real measure that you need to concern yourself with is the Price-to-Rent ratio. This formula can tell you if your next buy is a good deal, or a money pit. You can learn more about it here.
Finally, I will mention having worked as a lender during the bubble years of the early 2000s and the supposed bubble years today, that the environments are like night and day. In the 2000s, there were no laws that prohibited banks from making loans for people who just made up their income numbers. No credit was too bad, and zero down payment loans were actually a thing. Banks were betting on higher prices and looked the other way on everything else.
Nowadays, post-financial crisis, every document is verified. Employment, income documents, credit blemishes, and source of down payment funds. The loan quality has never been so good. The bar is set high, and complaints about how onerous the process is are the byproduct. For a bubble to take hold, not only does there have to be a belief in ever higher prices, there has to be a mechanism that makes the buying unsustainable. Margin loans were the mechanism for the great stock market crash of 1929. No income, no asset loans and subprime adjustable loans and interest only loans and negative amortization loans were the risky vehicles of leverage that resulted in unsustainable prices and eventually collapse.
What we are seeing now is a far cry from the bubble of the early 2000s. Sure, we've hit our previous all-time high and now expect to surpass it. And expect population pressures to continue driving up prices for the next few years. The housing bubble continued to rise throughout 2004 and 2005 when Bernanke was raising rates at the Fed. And the market will finally level off when rates keep going up, the economy slows down, and people stop getting married and forming families. Until then, the desire for one's own nest, the American Dream, is alive and well, and Millennials, a generation that outnumbers Baby Boomers even, are just waking up to it.
- Brian Nguyen is a senior loan consultant (NMLS 659743) who learned more about this stuff than he ever intended to. The opinions expressed here are solely his own.
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