Real Estate: Is A Bubble Coming?

Real Estate: Is A Bubble Coming?Are we facing a housing bubble? After all, as of June existing home prices have risen for 52 straight months according to the National Association of Realtors. You have to wonder how long such a streak can continue.

According to Realtor.com, “some folks these days are beginning to wonder whether the U.S. is seeing another housing bubble, like the one we suffered through beginning in 2007 — and a reprise of the bloody financial carnage that followed when it burst.”

If by “bubble” we mean a widespread decline in home prices followed by an instant and immediate collapse in new home construction then the view here is, relax.

It’s not a housing bubble we need to worry about – it’s something much worse.

A housing bubble seems unlikely in large measure because we don’t have the crazy and stupid financing that was a big factor in the 2007 crash. Today you can’t get a no doc loan, lenders have to verify your ability to repay under Dodd-Frank. Financing with huge, massive and sudden cost increases such as option ARMs have gone away. Toxic prepayment penalties are gone. The result of such changes is that foreclosure starts are at a 16-year low – and many of today’s foreclosure starts are actually “legacy” loans, financing originated before 2009.

If the question is whether home values will fall in some areas that’s already a reality. NAR reported that in the first quarter 154 out of 178 metropolitan statistical areas saw price increases – and 24 experienced lower prices.

The Real Estate Bubble

The real issue facing the real estate market is not real estate and – this time around – not toxic financing. Instead the issue is take-home pay.

Median household income dropped 7.2 percent between 1999 and 2014. There are no conditions under which we would have 52 months of consecutive price increases were it not for down-in-the-dumper mortgages rates which are now near historic lows.

Mortgage rates are independent of the Federal Reserve. When the Fed raised bank rates in December mortgage rates fell, but what if we’re not so lucky this time? What if the Fed engineers another needless rate increase and mortgage rates begin to rise?

If that happens you can kiss the recovery goodbye, not just good times in the housing sector.

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