There's More to a Bubble Than Rising Home Prices
What truly causes a housing bubble and the inevitable crash? For the best explanation, let’s go to a person who correctly called the last housing bubble ?– a year before it happened.
“A bubble requires both overvaluation based on fundamentals and speculation. It is natural to focus on an asset’s fundamental value, but the real key for detecting a bubble is speculation…Speculation tends to chase appreciating assets, and then speculation begets more speculation, until finally, for some reason that will become obvious to all in hindsight, the ‘bubble’ bursts.
I have taken to calling the housing market a ‘bubble’.”
– Bill McBride of ?Calculated Risk? calling the bubble ?back in April 2005
Where do we stand today regarding speculation?
There are two measurements that are used to determine the speculation in a housing market:
1. The number of homes purchased by an investor and
2. The number of homes being flipped (resold within a twelve-month period)
As compared to 2005, investor purchases are down dramatically (from 23% to 13%) and so is flipping (from 8.2% to 5.7%). McBride explains:
“There is currently some flipping activity, but this is more the normal type of flipping (buy, improve and then sell). Back in 2005, people were just buying homes and letting them sit vacant – and then selling without significant improvements. Classic speculation.”
What are the experts saying about speculation in today’s market?
DSNews? recently ran an ?article? which asked two economists to compare the speculation in today’s market to that in 2005-2007. Here is what they said:
Dr. Eddie Seiler, ?Chief Housing Economist? at ?Summit Consulting?: “The speculative ‘flipping mania’ of 2006 is absent from most metro areas.”
Tian Liu, ?Chief Economist? of ?Genworth Mortgage Insurance:
“The nature of housing demand is different as well, with more potential homeowners and far fewer speculators in the housing market compared to the 2005-2007 period.”
And what does McBride, who called the last housing bubble, think about today’s real estate market? Sixty days ago,? he explained:
“In 2005, people were just buying homes and letting them sit vacant – and then selling without significant improvements. Classic speculation. And even more dangerous during the bubble was the excessive use of leverage (all those poor-quality loans). Currently lending standards are decent, and loan quality is excellent… I wouldn’t call house prices a bubble – and I don’t expect house prices to decline nationally like during the bust?.”
Harry’s Bottom Line:
Speculation is a major element of the housing bubble formula. Right now, there are not elevated percentages of investors and house flippers. Therefore, there is not an elevated rate of speculation.
Feb. 19, 2018
There has been tremendous volatility in certain markets over the last few weeks (for example, the stock and currency markets). When this happens, some tend to lump all of their investments together and create an almost "End Of The World" scenario where everything loses value quickly and dramatically. Real Estate is an investment that can get caught up in this hysteria. Does the concern about the current housing market have merit?
Financial advisors have been warning us for months that the stock market was ripe for a "correction."
Experts have been questioning the value of alternative currencies for over a year.
In contrast, here are the opinions of three major players in the residential housing market:
"It's premature to worry about a housing bubble. The typical warning signs - excessive debt levels, poor quality loans, exponentially increasing home prices, rising vacancy rates and/or poor affordability compared to the past, and a high number of internet searches on the house flipping - are not present." Ralph DeFranco, Chief Economists, Arch Capital Services Inc.
"My thoughts on many recent discussions of the housing bubble - the bar for a housing bubble is higher than just prices being above some fundamental value. There must be widespread behavior change as well such as higher levels of fraud and speculation." Liu-Down, Genworth Chief Economist.
"US home prices are on track for a 5% nominal gain for the 4th consecutive year, returning national prices to their highest level since 2007. The growth has been driven by historically low mortgage rates and unemployment plus solid population and personal income growth rates...a meaningful correction should only be triggered by an unexpected economic shock." Fitch Report
Speculation has driven certain markets over the last year. However, it has not been speculation, but instead people's desire for home ownership, that has driven the real estate market. Check out our web site for residential properties in the South Florida area and Central Florida. North Carolina Property Search soon to come. WWW.HARRYBERRYREALTY, INC.
Harry Berry Realty, Inc.
Sept. 18, 2017
Here are five reasons listing your home for sale this fall makes sense.
1. Demand Is Strong
The latest Buyer Traffic Report from the National Association of Realtors (NAR) shows that buyer demand remains very strong throughout the vast majority of the country. These buyers are ready, willing, and able to purchase… and are in the market right now! More often than not, multiple buyers are competing with each other to buy a home.
Take advantage of the buyer activity currently in the market.
2. There Is Less Competition Now
Housing inventory is still under the 6-month supply that is needed for a normal housing market.
This means that, in the majority of the country, there are not enough homes for sale to satisfy the number of buyers in the market. This is good news for homeowners who have gained equity as their home values have increased. However, additional inventory could be coming to the market soon.
Historically, the average number of years a homeowner stayed in their home was six, but that number has jumped to an average of almost nine years since 2008. There is a pent-up desire for many homeowners to move, as they were unable to sell over the last few years because of a negative equity situation. As home values continue to appreciate, more and more homeowners will be given the freedom to move.
The choices buyers have will continue to increase. Don’t wait until this other inventory comes to market before you decide to sell.
3. The Process Will Be Quicker
Today’s competitive environment has forced buyers to do all they can to stand out from the crowd, including getting pre-approved for their mortgage financing. This makes the entire selling process much faster and much simpler as buyers know exactly what they can afford before home shopping. According to Ellie Mae’s latest Origination Insights Report, the time to close a loan has dropped to 43 days, after seeing a 12-month high of 48 days in January.
4. There Will Never Be a Better Time to Move Up
If your next move will be into a premium or luxury home, now is the time to move-up! The inventory of homes for sale at these higher price ranges has forced these markets into a buyer’s market. This means that if you are planning on selling a starter or trade-up home, your home will sell quickly AND you’ll be able to find a premium home to call your own!
Prices are projected to appreciate by 5.0% over the next year according to CoreLogic. If you are moving to a higher-priced home, it will wind up costing you more in raw dollars (both in down payment and mortgage payment) if you wait.
5. It’s Time to Move on With Your Life
Look at the reason you decided to sell in the first place and determine whether it is worth waiting. Is money more important than being with family? Is money more important than your health? Is money more important than having the freedom to go on with your life the way you think you should?
Only you know the answers to the questions above. You have the power to take control of the situation by putting your home on the market. Perhaps the time has come for you and your family to move on and start living the life you desire.
That is what is truly important.
Feb. 9, 2017
This is big news - President Trump on Friday signed two executive orders designed to weaken, or replace financial regulations.
Doing so, However, would return our country to a less regulated pre-financial crisis and exposing investors and Americans to the same risks in 2007, 2008 and 2009.
There are two regulations under attack - Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010.
Dodd-Frank, a set of regulations was signed into law in response to the financial crisis designed to limit risks and protect consumers. Basically looking out for the little guy.
The CFPB (Consumer Financial Protection Bureau) was established through Dodd-Frank, describes itself as "a U.S. government agency that makes sure banks, lenders and other financial companies treat everyday Americans fairly. It helps protects consumers from predatory schemes in credit cards, mortgages and student loans.
What if CFPB lost its power? Well, More mortgages could be written, delinquencies would increase, homeowners would probably use too much leverage with risky financial instruments no one truly understood. Short term would boost the economy, long term would cause the economy to crash as it did in 2008.
Some proponents of less regulation, who feel less government restrictions will inevitably lead to higher revenue and earnings, believe there are dangers that should be acknowledged. We could be pushing ourselves toward another financial mania-which would certainly not be helpful for investors, consumers or banks.
My advice-Buy Real Estate now and sell in 3 to 4 years!
Instant gratification has never translated to long-term stability!
Harry S. Berry
Harry Berry Realty, Inc
Feb. 7, 2017
There is no doubt that mortgage credit availability is expanding, meaning it is easier to finance a home today than it was last year. However, the mortgage market is still much tighter than it was prior to the housing boom and bust experienced between 2003 - 2006.
The Housing Financing Policy Center at the Urban Institute just released data revealing two reasons for the current exceptionally high credit standards:
- Additional restrictions lenders put on borrowing because of concerns that they will be forced to repurchase failed loans from the government-sponsored enterprises or Federal Housing Administration (FHA).
- The concern about potential litigation for imperfect loans.
What has been the result of these concerns?
6.3 Million Less Mortgages
The Policy Center report went on to say:
“It was so hard to get a mortgage in 2015 that lenders failed to make about 1.1 million mortgages that they would have made if reasonable lending standards had been in place. From 2009 to 2014, lenders failed to make about 5.2 million mortgages thanks to overly tight credit. In total, lenders would have issued 6.3 million additional mortgages between 2009 and 2015 if lending standards had been more reasonable.”
In an interview with DSNews, Laurie Goodman and Alanna McCargo of the Policy Center further explained:
“Our Housing Credit Availability Index (HCAI)* measures the probability that mortgage borrowers will become delinquent on that mortgage for 90 or more days, which we refer to as the default risk. This measure indicates that the probability of default rose from 12 percent in 2001 to a peak of 16.5 percent at the end of 2005/beginning of 2006, before declining to the current level of 5 percent. Stated differently, lenders are currently taking less than half the credit risk they were taking in 2001, a period of reasonable credit standards.”
The cost to the economy if we’re writing fewer loans…
Goodman and McCargo put it best:
“…fewer households will become homeowners at exactly the point in the economic cycle when it is most advantageous to do so… [They] will continue to miss this wealth-building opportunity. The median family wealth for homeowners is $195,400, with their home the most valuable asset for most; the median family wealth for renters is $5,400… Fewer potential homebuyers means the housing market will continue to recover more slowly. At the same time, fewer buyers create a strain on other benefits to the economy which homebuying brings such as spending on home goods and an increase in construction jobs.”
The housing market boom and bust caused many mortgage providers and lenders to tighten their lending standards in an effort not to repeat the recent past. This paired with many homebuyers disqualifying themselves before they even apply for a loan, due to the fear of rejection, has led to many households not yet becoming homeowners.
*The HCAI measures the percentage of home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.
Feb. 7, 2017
The most recent Housing Pulse Survey released by the National Association of Realtors revealed that the two major reasons Americans prefer owning their own home instead of renting are:
- They want the opportunity to build equity.
- They want a stable and safe environment.
In a recent article by The Mortgage Reports, they report that “buying and owning a home is the essence of ‘The American Dream.’ Each month, your housing payments go toward owning your home instead of renting it; building your personal wealth and assets instead of someone else’s.
History has shown that homeownership is a clear path to wealth-building, with homeowners boasting a net worth [that is] multiples higher than the net worth of renters.”
Does owning your home really create a more stable environment for your family?
A survey of property managers conducted by rent.com disclosed two reasons tenants should feel less stable with their housing situation:
- 68% of property managers predict that rental rates will continue to rise in the next year by an average of 8%.
- 53% of property managers said that they were more likely to bring in a new tenant at a higher rate than to negotiate and renew a lease with a current tenant they already know.
We can see from these survey results that renting will provide anything but a stable environment in the near future.
Homeowners enjoy a more stable environment, and at the same time are given the opportunity to build their family’s net worth.
July 1, 2016
I believe that BREXIT (Britian’s vote to discriminate) will have a long-term impact on the economy. Pushing up the U.S. dollar and sending down mortgage rates will flood the real estate market with investors as a safe haven. Demand for Florida real estate could rise.
Global corporations could show additional interest in U.S. real estate as they see the U.K. as a less certain place to invest their money.
We know that a rise in the dollar will hurt U.S. exports, and mortgage rates will drop possibly hitting new record lows. If you’re a borrower, don’t wait to lock your rate. Do it now! I am sure this won’t last long. Let me give you one more piece of advice…. if you like a home, don’t kill the deal over a $2,000-$3,000 price difference between the yourself and the seller. When rates come down, home prices go up!
I also believe that Europeans and South Americans who may have looked to London to invest will alternatively turn their sights to U.S. residential real estate. The British economy will take a hard hit, and fewer Brits will now be able to buy in the U.S.
As far as the home-mortgage refinancing which started out a little slow earlier this year, I believe that this will give lower rate-refinancing a new life. Maybe there’s another mini-refinance mortgage boom coming!
These are some of the short term results. In the long run though, the vote could cause job loss, income loss, and loss of consumer confidence. This is the unavoidable consequence of voting against your own interests.
Harry S. Berry
June 21, 2016
The Face Of Florida: Hollywood by the Sea Is On The Verge Of A Housing Revolution
Hollywood is the next big thing in Florida real estate.
Founded in 1925, the city continued to silently climb up the rank in terms of popularity and magnitude. It is the twelfth largest city in Florida, and it's now on its way to becoming even larger.
The primary reason for Hollywood's recent growth is the explosive real estate market in that area. This growth can be seen in two ways:
- As part of the larger housing boom in South Florida, and
- As a distinctive market that is emerging due to its own merits
As years will pass by, the real estate growth in the city will continue to branch out of the larger trends and follow its own path.
In some ways, it has already begun.
So why didn't it happen sooner? The reason is simple. Hollywood's fate has always been connected to the two cities between which it lies - Fort Lauderdale and , of course, Miami. Over the years, these cities have claimed the lion's share of the housing market, but that's going to change.
People who don't want to spend more on a worthless location in a noisy Miami environment continue to flock to Hollywood for better pricing, affordable housing, and more importantly, peace of mind. Hollywood is the future.
Then there is the beach.
The beach is the heart and soul of Florida. It's also this city's identity - always has been, always will be. That's why it's the other Hollywood, and its pride is the award-winning Blue Wave beach.
The Hollywood Broadwalk is an American icon. Considered to be one of the top 10 nostalgic promenades, it's perfect for long walks or a run along the beach as the sun rises in the background. Surrounded by shops, hotels, restaurants, and clubs, it is the perfect microcosm of the Hollywood lifestyle.
However, when we look past beyond the romanticism associated with Hollywood beaches, we see that this city has a much more practical value - the real estate value.
As tourists continue to pour in, captivated by the blue waves and breathtaking sunrises, a network of hotels continues to emerge. A prime example of this is Margaritaville's Hollywood Beach Resort. Sprawled out on a six-acre stretch of land and occupying 450 acres of the beach front, it is the next big thing.
The interest n Hollywood as the place to be is not just superficial. The excitement continues to seep into the housing market. Hollywood is witnessing a stunning growth in condos, buildings, and single-family residences as more and more people continue to buy, sell, and rent housing units.
Let's talk numbers
With more then 4,900 condo units in the plans, the Hollywood-Hallandale Beach market is second only to Miami. One of the prominent examples includes the Oceanbleau tower. Set to open next year, it has 48 units starting at $1.6 million. Projects such as these are changing the landscape of the condo market.
The housing market in general, however, shows positive signs of growth and an enormous future potential. For instance, in just one year, the home values have increased around 13% which amounts to a whopping 46.1% increase over the past five years.
With housing demands skyrocketing, Hollywood is the perfect place to be!
-Harry S. Berry