Lately, I have been getting this question quite a bit; do you think that we are in a housing bubble? I have been in this business for a long time, including the run-up to the last financial crisis and now watching the lowest inventory levels we have seen in several decades resulting in bidding wars. During the financial crisis in 2008, we saw housing prices collapse over 50% in some cases. But comparing that timeframe, to what we are going through right now in 2021, is like comparing apples and oranges. Back then, loose lending standards allowing for 100% financing, were the norm. There was a big push by the federal government to get as many people in the houses as possible. The ability for virtually anyone to get financing created a situation where flipping houses was the new way to play the stock market except you didn’t need hardly any money. This drove up housing prices but also had builders ramping up housing inventory dramatically, which ended up peaking in 2007. So, all the sudden you had way more inventory than buyers. It was a house of cards and it didn’t end well. Since then, housing prices have recovered dramatically, for most areas of the country, valuations are significantly higher than the peak back during the 2008-2009 crises. Logically, this begs the question; are we on the precipice of another bubble that will soon burst. There are several reasons why housing prices are likely to remain strong in the near term. First is the obvious one, supply and demand. Let start with supply. When COVID-19 hit last year, homebuilders were severely hampered. This wasn’t just because shutdown orders made contractors stop work. Even in places where construction continued, material and labor shortages slowed progress. The industry, which was already operating at a slower pace than in the past, basically lost about six months’ worth of production in 2020. Higher existing home listings simply couldn’t replace that lost inventory. Inventory levels have been dropping for years, but COVID-related factors have super charged these changes. After the shutdown last year, it seemed that everyone was reassessing their housing situation. They either wanted to leave the inner city, needed more space for home office / kids, or now they had the ability to work from home. This opened the possibility that you could really live anywhere….so, people started looking. Add to that two other dynamics at work. The key factor in housing demand is household formation. Single people tend to live in apartments or rental homes. They turn into homebuyers when they think about having children, because they need more space and stability. The age at which this happens has been remarkably steady around 33. In other words, to gauge housing demand in any given year, look at birth rates 33 years earlier. Those who are 33 now were born in 1987 and 1988. At that point, births had been rising since the 1970s low and would accelerate further for a few more years. That’s why the last few years saw heavy demand from first-time buyers, and why it should continue a while longer. Now add to this the retiring Baby Boomers who also want smaller homes as they enter downsizing mode. We have sharply rising demand combined with sharply lower supply. Of course, home prices have been rising. They can hardly do otherwise. There are also a couple of other factors to consider: 1) people have significantly more equity and 2) underwriting standards are significantly more robust than they were back in 2008/2009. So, if you do run into trouble paying their mortgage, you can just sell so we won’t see some massive foreclosure wave. What could derail this, is if mortgage rates went up significantly higher, but for the next couple years the Federal Reserve is unlikely to allow this to happen because it would derail the recovery.
Making a Move Without Selling First
In this current environment, it is difficult to make an offer on a new home contingent on the sale of your existing home. But there are strategies that may allow you to avoid this so that you can buy a new home and sell your existing shortly thereafter. Piggyback Mortgages are making a comeback! What is a piggyback, you ask? It is a way to structure a loan for the purchase of a new home where you have a first mortgage, and you do a Home Equity Line of Credit (HELOC) simultaneously as a 2nd mortgage. You will do this if you believe you have significant equity that will be realized from the sale of your existing home and you would like to use that for the down payment on the new home. This allows you to structure the loan so you end up with the first mortgage amount you would like based on how much you believe you would “Net” from the sale of your existing property and the balance up to 90% of the purchase price, would be in the form of a HELOC that could be paid off when you sell your home. Let’s take an example… Let’s assume that you could sell your existing home and walk away with $120,000 that you would like to use for the down payment on your new house. You want to buy a new home for $400,000. We would set you up with a new first mortgage for $280,000 and you can simultaneously take out a HELOC for $80,000. That is total loans of $360,000 (or 90% of the total purchase price which is the maximum allowed). Once the existing house sells, you would just pay off the HELOC and you would be left with the $280,000 first mortgage that you were hoping for! Couple things to consider here: 1) you would still have to scrape together the 10% down payment ($40,000) out of funds on hand, a gift from relatives, loan on a 401K or other ideas we could suggest and 2) We would still need to make sure we could qualify you for both house payments. There are other strategies we could suggest where you would put less funds down up front, so please call us to explore alternatives if you are considering a move!
Licensed in Multiple States
Remember that we are Licensed not only in Georgia but Florida and South Carolina as well. Our company is nationwide now so if we cannot help you, we most likely can refer you to another reputable loan officer in others States throughout the US.
Interest Rate Update
During February and early March, mortgage rates jumped 1/2 percent. It was a very sharp move that happened in response to the stimulus bill that pushed through Congress by the Democrats. Investors believed that all this additional money being pushed through the economy was going to be inflationary and bond traders biggest fear is inflation. So, when they sense that inflation will become problematic, they will sell mortgage bonds and that drives up rates. The Federal Reserve believes that this inflation is transitory (it may spike for a short period but then it will moderate) and have been consistent with their messaging regarding this. Fortunately, this has calmed the markets over the past month. Over the past four weeks, rates have actually come back down a little. 15-year rates are still in the 2’s and 30 year are hovering in the very high 2’s to low 3’s depending on your situation. There are still plenty of opportunities to refinance and it couldn’t be a better time to purchase!
“I believe that if we are to create peace in the world, we must first create peace at home.” – Richard O’Keef