Windermere's chief economist, Matthew Gardner, recently shared some insight on what we're currently seeing in our local housing market. Here is his commentary, originally posted on Windermere.com.
Exactly 10-years ago this month, Alan Greenspan was asked if he had any concerns regarding the housing market. At that time, he emphasized that he saw no sign of a nationwide housing bubble, but he did have concerns over "froth" in the market and pointed to a big increase in the purchase of investment properties — particularly in second homes. As a result, he said, there are "a lot of local bubbles" around the country, but not at a national level.
As we are all very much aware, he, along with many other esteemed economists, was incorrect in his prediction that there was no national housing bubble in sight.
So here we are, a decade later, and some are starting to suggest that we are on the verge of another “bubble” bursting due to an overheated housing market. I’m often asked if there is any truth to this, and my response is no, I don’t believe there is a national bubble on the horizon. And here are the reasons why:
1. The flippers have left the building – in as much as it causes me untold angst to see the resurgence of reality TV programs espousing the wonders of house flipping, the country has seen a marked slowdown in this type of business. Why? Well one reason is that the number of foreclosed homes continues to drop. Foreclosures are the preferred property type for flippers, as margins can be significantly higher.
2. Lending standards remain very stringent – Banks actually did learn a lesson from the collapse of the housing market and remain wary, and because of this, qualifying for a mortgage remains difficult. For example, in April of this year, the average FICO score required for an approved conventional home loan was 756 with a 19 percent down payment. The average FICO score for someone who was denied a loan (with an average down payment of 17 percent) was very high at 699.
3. Home prices are up, but not to pre-bubble levels – here I looked at data provided by S&P Case Shiller index which is a useful resource because it calculates the increase/decrease in value of the same house over time, rather than just the make-up of sales during a specific time period. At the national level, the bursting of the housing bubble led to a 27 percent drop in the index. The index has risen back up but is still 9 percent below the prior peak.
4. Interest rates are going to (eventually) start to rise – and this will take some of the heat out of the market. Now, there are some who will say that any increase in mortgage rates will negatively impact the housing market, but I don’t agree. Although it is true that an increase in rates does decrease buying power, the naysayers are ignoring the fact that we are in a growing economy. The growth in employment, and the subsequent drop in the unemployment rate, will lead to wage growth, and increasing incomes will take some of the sting out of any rate increase.
Given all of these points, I do not see the risk of a national “housing bubble” anywhere in the foreseeable future; however, I do think we are seeing localized “froth” in some markets.
View the original post by Matthew Gardner on the Windermere blog.