Thursday, November 24, 2016
Housing Bubble (Toil & Trouble)
The 2008 Foreclosure Crisis seems like only yesterday. Surely we must still remember the lessons learned from the crash and will not again allow real estate prices to inflate above a sustainable level... right? But here's a little chart that sort of scares me - note that we're at the top of the second peak in this roller coaster ride called the housing market:
Yesterday the FHFA announced an increase to the loan limit for prime loans, with the new maximum home mortgage loan for one-unit properties set at $424,100 for 2017 (more in higher-priced markets). This is the first maximum loan dollar increase since 2006. Unless you follow real estate or are in the market for a large mortgage loan, you may not have recognized the significance of this increase. The Housing and Economic Recovery Act of 2008 prohibited any increase in the loan limit above $417,000 unless and until the average U.S. home price returned to its pre-decline level. That hasn't happened until this year. The FHFA just announced that "that average home prices are now above their level in the third quarter of 2007." I guess we're back, baby.
In a way, it isn't that surprising that housing prices have been growing back toward their record peak levels, particularly in some parts of the country. The government has done its utmost to help us "recover" from the market meltdown. For one thing, the Federal Reserve has aggressively pushed down interest rates for the past several decades - and they keep setting a new record for "how low can you go?" Such extremely low interest rates means very low cost of capital, and cheap capital makes it smart to borrow and stupid to save. Is it any wonder that rational consumers borrow and borrow and borrow, and hardly ever save? (this chart shows interest rates over time - better version of it is here).
Now, some types of borrowing are more available than other types. There were times when anyone with a pulse could get a credit card, and for several years in the run-up to 2008, anyone who owned or wished to own a home could obtain a mortgage loan for nearly the entire sticker price or appraised value of the home. A little not-so-long-ago-history primer: easy mortgage credit fueled a buying and re-fi frenzy for homes that drove up prices, all premised on the idea that real estate values always go up. It couldn't last. It didn't last.
While it has been popular during the past 8 years to blame lack of regulation for the Housing Crisis, I concluded back in 2010 that the low interest rates played a very key role (along with imaginary underwriting) in the out-of-control mortgage lending. Other analysts have agreed (see also here and here). The Economist is similarly skeptical that high housing prices indicate a booming economy, pointing out that "despite efforts to fix the plumbing of the American mortgage market, housing in the United States remains a dangerous menace to the world economy" and explaining that soaring property prices in America are "underpinned by low interest rates."
The "bubble" that we now find ourselves in is different. For one thing, mortgage credit has become more difficult to obtain, due in part to the (somewhat) more attentive FHFA underwriting approaches, the (slightly) more stringent requirements for loans to qualify as prime, and the (marginally helpful) disclosure obligations mandated by the CFPB. But if you can get a home loan, it's cost is still very low because of low interest rates. Cheap capital enables rising prices. Another thing that is arguably different this time around is that the supply of homes has not increased as quickly as previously, and in some parts of the country, shortage of supply may be helping to prop up property sale prices (see CNBC story here).
The Trump win, analysts believe, will lead to multiple increases in these record-low interest rates, policy makers have indicated that this could happen in December 2016, and bank stocks have brightened at this news (after initially falling, Wall Street rallied after Trump's unexpected victory - see story here). Of course, the Fed had previously promised to raise interest rates this year, but that has not really happened (see NY Times story here). If interest rates really do increase (and I tend to think they finally will, see Wall St. J article here), will this cause housing prices to drop in 2017? Would that necessarily be a bad thing?
For more stories re: Housing bubble 2.0, the 2016-17 edition, see here, here, here, here and here. Some of these are major news outlets, others more fringe-y, but they raise issues that those of us who watch the housing market with baited breath should not ignore.