3 Reasons the Housing Bubble Will Not Pop (2022)
Mortgage Banker
Richard Blair
Published on April 22, 2022

3 Reasons the Housing Bubble Will Not Pop (2022)

Do you still believe that owning a home is the American Dream? If you answered Yes- you are not alone. A report from the National Association of Realtors determined that over 86% of buyers agree homeownership is still the American Dream. This number will most likely remain high as rent increases in Arizona, and throughout the country, have skyrocketed in the past year. No matter what the mortgage interest rates the fact is that rent is 100% interest.

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The bottom line you either pay your own mortgage and try to build equity in a home you own OR pay the landlord’s mortgage and have no control over rent costs.

 

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History of home appreciation since 1940’s

Every month you make a mortgage payment on a fixed loan program a portion of that payment reduces the principal balance you owe and adds to your equity.

  The chart shows a steady increase in home values since 1945 – then a price spike in 2006. Then home prices declined dramatically from 2006-2008 as part of the mortgage meltdown.

 

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We have seen home prices steadily increase the last several years with Arizona one of the leading states in year over year housing appreciation. Have home prices peaked? Will we see a housing crash in 2002 like we experienced from 2006-2008?

Reason #1: Tighter home Lending requirements

The primary reasons that the homes literally crashed in value from 2006-2008 are NOT evident in the 2022 housing market.

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  • Homes were going into foreclosure at an incredible pace, plus short sales, because the home borrowers were not truly qualified for their mortgage payment.  Lenders were willing to take greater risks in loan products, ease underwriting requirements and offer risky loan products.

There were many loan programs where borrowers simply “stated” their income and it was not verified by the lender. Some programs allowed the borrower to state both income and assets. A large percentage of these borrowers were approved by the lender with little, or no money, down and no verification of their income or assets.  When home prices started to slide borrowers became “upside down” on their mortgages. Meaning they owed more than the home was worth. So, many decided to just walk away and opt to give the home back to the bank or attempt a “short sale”. A short sale is where the lender agrees to the sale of a home and takes less than what is owed on the mortgage.

  • Home Equity Loans were the rage. Some lenders were offering borrowers to borrow more than the value of their home. Homeowners were taking all their equity out of their home so when home prices started to decline the homeowner was once again “upside down.” Many of these homeowners walked away from their homes and this lowered values even more.

After the housing crash in 2008 the pendulum for lending standards and guidelines swung way over to the other side. The standards for being able to qualify for home loan increased substantially, risky loan products were eliminated by most lenders, laws were passed requiring lenders to follow very strict guidelines regarding debt-to- income ratios for borrowers to make sure they could really afford their home. All this resulted in very low foreclosure rates because borrowers were truly qualified, had a down payment on their home, with their income and assets being verified.

While Home Equity Loans have ticked up because of the increase in equity over the past few years. The lenders in the home equity market make sure that there are tighter lending guidelines for approving borrowers and lower limits on how much of the equity you can borrow. This varies between lenders between with the typical range between   80% to 90% of your home value. Some home equity lenders have taken a safe approach and only allow up to 80% of your current home value. This leaves a greater cushion if home values do go down so that the homeowner will not be “upside down.”

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#2 Reason- Too Many buyers & too little housing inventory

According to Freddie Mac the United States is an estimated 3.8 million homes short of the demand that exists in the country for single family homes. A shortage of housing inventory is estimated to be with us for a long time.

In 2021, and in 2022, for most markets, there are many qualified home buyers looking for single family homes. The number of buyers in a housing market represents “demand.” As mentioned, housing inventory-or the number of homes listed for sale- is at historic lows.

Many markets may have a 1-to-2 month supply of homes when home buyers would like to see a 6-month supply to create some equilibrium in the market. So, when the demand for homes is very strong (like in 2022) and the supply of homes on the market is limited the home prices will remain stable, or increase.

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The sign to look for before any housing bubble, or crash, would be an imbalance in the market. This would be where the supply of available homes for sale is far greater than the demand from qualified home buyers. We will not see home prices fall substantially until the inventory of homes for sale is far greater than home buyers.

 

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#3 Reason- Forecasts for historically strong year for home price growth

Zillow recently forecasted a downward forecast in home values that was picked up as some media outlets that there is a housing bubble. Not True.

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Zillow had forecasted a 17.8% rise in home prices over the previous year and revised down to 14.9% . Even with this 3% downward revision this forecast would still be historically strong year for home price growth.

The estimate for home values increasing is still strong considering recent rise in interest rates, higher home prices and a limited inventory of homes for sale.

One reason for the revision was affordability concerns. With rising home prices and increased interest rates there are going to be some buyers that may no longer be able to afford the home of their choice. This will ultimately influence the market; however, it may take some time to see any substantial impact.  It may create a situation where there is slightly less competition resulting in fewer multiple offers or seller demands.

About the Author: Richard Blair (NMLS# 213176) is a mortgage loan originator and mortgage planner with 24 years of lending experience. Richard and his Team combine personal touch, ongoing education, and cutting-edge technology to provide an amazing customer experience. Richard is part of the dwell Mortgage Team at Victorian Finance (NMLS#50635).  

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