One of the most common questions I hear is, “Are we in a housing bubble?”
Here’s the short answer: A big fat NOPE!
Here’s the long answer: look at the data below.
Homeowners have a lot more equity now compared to the pre-crash days. Between 2005 and 2007, $824 BILLION dollars in equity were taken out of homes by Americans. Many saw their home as an ATM machine. This left many people underwater as prices fell, which inevitably led to foreclosures. Over the past three years, cash-out refinance volume is LESS THAN 1/3 of what it was compared to the three years leading up to the crash. Moreover, 38% of owner-occupied homes are paid off today. Of the 62% of owner-occupied homes that have a mortgage, 1/3 of these are “equity rich,” meaning at least 50% of the mortgage is paid off. When combining these figures, we see that 56.7% of owner-occupied homeowners have at least half of their home paid off, if not completely paid off. In short, people today have WAY more equity than they did pre-crash. The "ATM" mentality has dramatically subsided, which is good news.
Supply is VERY limited and competition is FIERCE. “Months of inventory” measures housing supply:
· Months of Inventory < 3 = Seller’s Market
· Months of Inventory between 3-6 = Neutral Market
· Months of Inventory > 6 = Buyer’s Market
Between 2006 and 2008, the national months of inventory increased from 5 months to 11 months; it was over 7 months in twenty-seven of those thirty-six months, yet home values continued to rise. Now let’s compare these statistics with that of the last few years in the Sacramento metro area. 3 years ago, months of inventory was only 2; now we are at 0.9. This is significantly LOWER than the “pre-crash” market. The price increase we have seen over the last few years is completely natural, given the low supply and high demand.
In contrast, the pre-crash price increase was unnatural. According to Keeping Current Matters:
“During the housing boom in the mid-2000s, there was what Robert Schiller, a fellow at the Yale School of Management’s International Center for Finance, called “irrational exuberance.” The definition of the term is, “unfounded market optimism that lacks a real foundation of fundamental valuation, but instead rests on psychological factors.” Without considering historic market trends, people got caught up in the frenzy and bought houses based on an unrealistic belief that housing values would continue to escalate.”
The mortgage industry is more conservative now. The mortgage industry didn’t help the psychological “irrational exuberance” because they would give mortgages to just about anyone, even people who COULD NOT afford them. The mortgage industry back then was like Oprah, “YOU get a mortgage! And YOU get a mortgage. And YOU get a mortgage.” The Mortgage Credit Availability Index (MCAI) measures how easy or difficult it is to obtain one. Higher = easier. Lower = difficult. The all-time high figure of 868 was in 2006, which is a stark difference of today’s 118.8 figure. This low number shows that today’s decision to purchase is more than likely a smart financial choice, as opposed to many of those pre-crash choices.
But what about when mortgage forbearance ends? According to the Mortgage Bankers Association, only 3.25% of mortgages are in forbearance. Even if a portion of these homeowners did need to sell, the statistics show that almost 57% of total owner-occupied homeowners have at least 50% of their loan paid off as mentioned before. Given very high demand, the high number of equity rich homeowners, and the small 3.25% forbearance figure, a housing bubble is not likely any time soon.
Sources:
コメント