From the desk of Josh Barker @ RE/MAX
If you've been listening to the recent news reports coming out across the country, many people have been asking the question "Are we in a housing bubble?" or "..is there a housing bubble forming?". This month I'll break down what happened during the last housing bubble in 2006 and what signals to look out for in the future.
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Some of the hotter real estate markets in the state with very strong economies such as the bay area and Southern California may be beginning to form a bubble. These areas are primarily fueled by the tech industry and are experiencing a large wage increase, liquidity increase, and an increase from foreign investment.
Here in Shasta County, our local economy continues to be stable, and we have not experienced any dramatic shifts in income or capital which would inflate the housing market prices beyond normal levels. All things considered we are in a very balanced housing market at this time.
What caused the previous housing bubble?
Looking back at the previous housing peak of 2006, nearly 50% of all loans were classified as "sub-prime" loans. Meaning that, the government wanted to allow more buyers to enter the housing market. The way they achieved this was to lower the credit score guidelines, lower the debt to income ratios and ease underwriting requirements. These lending practices resulted in new buyers to the market and also drove home prices up as a result.
Nearly 30% of purchases were based solely on investment or speculation. Real estate speculators are buyers who purchase a property with the intention to resell for a profit in a shorter period of time.
Close to 40% of loans were inferior loan products such as interest only or negative amortization loans. Inferior loan products are usually associated with a significant payment increase in 3, 5 or 7 years. Unfortunately, so many of these loans defaulted and fell into foreclosure since the homeowners could not afford the new higher payment.
New construction back in 2006 was at an all time high... There was a abundant re-supply of inventory to the market that was taking place at the same time we had the loose lending guidelines.
All of these factors contributed to the perfect recipe for a housing crash.
What's going on in the housing market today?
Shasta County's housing market today is performing extremely well and is very stable. Over 90% of all home purchases are based on "prime loans" such as a 15 or 30 year fixed mortgage. Today's buyers are high quality buyers with great credit scores, excellent work history and good tax returns. Only an estimated 10% of home purchases are to investors, and very few speculators are participating in the market at all. The lending practices have improved significantly over the past 10 years, and the inferior loan products we had in 2006 are absent from the market.
New construction is currently very low and most of these homes once completed are sold in a short period of time.
What are the signals that could contribute to a housing bubble?
1. More "sub-prime" buyers entering the market through less strict lending guidelines.
2. An significant increase in speculation and investment purchases.
3. Bad loan products including interest only and negative amortization returning to the market.
4. Massive amounts of new construction which could over-supply the market and drive prices down.
In addition to the signals mentioned, there are several external factors to watch out for as well. For example, economic factors such as employment and inflation could have an impact on housing. In addition, a significant interest rate increase could have a negative impact on home prices. These external factors play a major role in home prices and are very difficult to predict.