The insanely hot real estate market is beginning to raise some eyebrows. A paper published by the Federal Reserve Bank of Dallas titled “Real-time market monitoring finds signs of brewing U.S. housing bubble,” stated “Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s. Reasons for concern are clear in certain economic indicators…house prices appear increasingly out of step with fundamentals.”
During the pandemic, historically low mortgage rates (we will miss you) and a demographic wave of first-time millennial homebuyers helped to spur the ongoing housing boom. Does that alone explain the explosion in home prices though? Another factor could be the fear of missing out, a key factor in the last housing bubble. However, while researchers see a bubble beginning to form, they do not think we are headed for a 2008-style crash. “Based on present evidence, there is no expectation that fallout from a housing correction would be comparable to the 2007-09 global financial crisis in terms of magnitude or macroeconomic gravity. Among other things, household balance sheets appear in better shape, and excessive borrowing doesn’t appear to be fueling the housing market boom.”
This is definitely true. The lending industry is much more regulated now since the 2008 crash. If anything, the Bayside team is seeing less people qualifying for conventional loans than ever before. Due to rising home prices and stagnant wages? Yes, however also due to much stricter guidelines. We have seen a higher number of NON-QM loans due to the stricter guidelines with homebuyers using, for example, bank statements instead of tax returns to qualify. Industry professionals are hoping that spiking mortgage rates can help to tame runaway home price growth before prices get so high it leads to a bursting bubble. While higher rates will tame the housing market down, it is hurting millennials, who are supposed to be driving the new housing market, as their debt-to-income ratio rises and wages stay consistent. Higher rates will also discourage investors, which accounts for a large portion of home sales today. Believe it or not, one of our clients had an offer accepted and was supposed to sign the next morning. Before they could sign, an investment bank came in and paid all cash… this is the market that Americans are dealing with today.