Tag Archives: interest rates

ANOTHER HOUSING BUBBLE?

New Housing Bubble Coming?

housing bubble
Another Housing Bubble Coming?

Are we entering another real estate market “bubble?” Some folks I talk to believe that prices have risen too quickly and that it will all come crashing down again.  Recent history will tell us that no one knows what the future holds in this regard.  Pricing in the market is one factor for consideration, but the strength of the market is determined by much more.  Not only can our politicians make new  laws with unintended results, but major catastrophic or world economic events can affect the US real estate market.  Here are some facts to help you decide where we are in the real estate cycle.

While prices have risen dramatically over the last year, they are nowhere near the highest prices that were  seen just prior to the downturn.  Many areas have seen 20%+ appreciation over the last year which is driven by demand.  I don’t expect us to see appreciation continue at that rate over the next year because of several factors but it will be a while before we see equilibrium between supply and demand.

ALL loans available today require documentation of a buyer’s ability to repay the loan.  Lenders require much more information from buyers today before approving a loan.  Long gone are the stated income loans (aka: liar loans) that allowed buyers to merely pull numbers out of a hat to qualify for a home loan (of course, that doesn’t mean they won’t come back).  When I was VP of Sales for Lennar’s Northern California Division, I can’t tell you how many times buyers made loan applications with our “in-house” lender and were declined; only to have the buyer return with a stated income loan approval from another lender.  Hmmm, let me see; did their income go up in just few short days? The point is that loans originated today are more sound and more likely to be repaid than in the past.

Most local market areas have  1.5- 2.0 month’s supply of inventory of homes for sale. A market in equilibrium between supply and demand will have 3-6 months of inventory available at any time.  In other words, if there were no additional homes placed on the market for sale, it would take 3-6 months to sell everything that was currently available.  We are seeing a trend toward equilibrium but we are still in a seller’s market and it will likely be several months before supply and demand are equal.

Short sales and foreclosures as a percentage of total sales are way down.  These sales tend to sell at lower prices.  So one reason that median price has increased is merely because there are fewer short and foreclosure sales in the market.  In addition, this demonstrates that the market is building real strength.

Interest rates are up 1% or more since the beginning of the summer.  This will tend to push home sales toward equilibrium in a seller’s market.  Rates will likely creep up over the next 12 months, however, it is expected that rates will stay relatively low compared to historic highs.

While short and foreclosures sales are down, traditional sales are up. Why? Because the price increases we have seen in the market allow homeowners to sell their homes without credit impairment and in some cases, actually making a few bucks along the way.  And most of these sellers will be new buyers in the market.

While there are many external factors that can affect the stability and strength of the real estate market, there is no evidence, at this time, that would lead us to believe we are in a “bubble” or even close to being there.  As more inventory comes into the market, the rate of home price appreciation is slowing yet demand is still strong.  Barring unforeseen circumstances, there is every reason to believe that we are headed toward a more stable market with reasonable price appreciation and inventory. In other words, we are heading in the direction of equilibrium, not of another crash.

Steve Quaranta
Better Homes and Gardens Real Estate

INTEREST RATES JUMP 1%!

rising interest ratesAfter Fed Chairman Ben Bernanke’s address last week, stocks dropped and interest rates increased.

As recent as a month ago, it was still possible for a home buyer to purchase a home with an interest rate of between 3% and 3.5%. Today, rates are generally floating around 4.5% or higher. In the big picture of housing interest rates, 4.5% is still an excellent rate, but we’ve all been spoiled in recent years and this change does impact the housing market. Let’s take a look at how this rise in interest rates is affecting the purchasing power of potential homebuyers in the marketplace by way of an example.

Let’s say that a buyer is qualified to purchase a home priced up to $400,000, assume that the buyer is putting 10% down and then look at payments under two interest rate scenarios as follows:

Purchase Price: $400,000
10% Downpayment: $ 40,000
90% Loan Amount: $360,000

Monthly Principle & Interest Payments
At an interest rate of 3.5% : $1617
At an interest rate of 4.5%: $1824
Increase in Monthly Payment: $ 207

Assuming that $360,000 was the maximum loan amount that our buyer could qualify for at 3.5% with a payment of $1617, what is the new price that our homebuyer can now afford? The new maximum loan amount based on a payment of $1617 and an interest rate of 4.5% is $319,133. With 10% down, the buyer’s maximum price is now $354,592 or $45,408 less in price.

Is it reasonable to think this will affect demand on the housing market? IT SURE IS! Our homebuyer’s purchasing power just went down by more than 11% with a 1% increase in interest rate. Whatever risk concerns have been in the past about price declines in the market, a 1% increase in rate overshadows to a great deal any decline in market price.

Will prices continue to increase at the rate we seen over the last several months. I’m seeing a change in the market now with prices leveling off through the summer. While it’s reasonable to assume we will see prices continue to rise, I don’t believe we will see the rate of appreciation continue at the fevered pace of the last year. Will interest rates be higher than 4.5% by June of 2014. Who knows? I have talked to several lenders and they are at odds with each other on this point.  Any potential buyer or seller should at least be prepared for the potential of higher rates over the next year.

If you are looking to buy a home in today’s market and have been pre-approved on a home loan through a lender, it’s a good idea to huddle back up with that lender to determine if you need to adjust your considerations on price, square footage and potential location.

If you are a homeowner thinking of placing your home on the market, it is important to understand the impact of rising interest rates, buyer’s purchasing power and negative impacts on demand.  Bottom line: Price your home appropriately and rely on the advice of a Real Estate Agent you trust who will provide you the facts about pricing and marketing your home.

Steve Quaranta
Better Homes and Gardens Real Estateimage003
Email: steveq@teamq-re.com
Phone: 916-276-7653