We’ve all seen it, we’ve all heard it, and many have experienced it first-hand… Real estate has been all the rage in 2021… In fact for the past year, who would have even thunk it, we’ve witnessed demand go from crazy to crazier! And what is wild is that it just keeps on going… inventory shortages, inflated home values, low interest rates, bidding wars, way over-ask offers, waived appraisals and inspections, cash deals…. It’s like the Wild Wild West out here... and is there any end in sight? Well, if any of this resonates for you, get ready to get schooled… because the current housing bubble, if that’s even what it can be called, is precisely what we are talking about today on this episode of Real Talk with Big Red. Episode Takeaways: - Why the bubble may not actually burst, plus ways to capitalize on the slow leak - When it makes sense to pay cash and when to leverage with financing - How to engage in this intense market without losing your lunch
The housing bubble… more like the housing mylar balloon… instead of it suddenly bursting without warning, it just sort of slooooowly deflates… ever notice how mylar balloons hang around for WAY longer than you think. Well, it’s a good analogy anyway. At least, I think it is.
Matt Boyce is here with us today… He is Vice President and Managing Partner of Garden State Home Loans located in Cherry Hill, New Jersey. For those of you who may not already know Matt, and let’s be honest, who among us who live in this area and practice real estate DOESN’T know Matt? He’s basically the Guardian of the Garden State, well, at least as it pertains to Home Loans. Matt partnered with Garden State Home Loans in 2011 right in the heart of Cherry Hill, NJ and has since expanded the company’s footprint over the years and is now currently licensed in SIX states. Amazing and awesome. So allow me to welcome my co-host and guest today, Matt Boyce! Welcome Matt!
So we’re talking about the housing market today…. First, let’s get you a plug before we launch into some of the listeners’ most common questions about this topic.
Tell me, Matt, HOW… perhaps more importantly WHY did you get into this business and what would you say ignited your passion for home loans?
So Matt, I’m sure you get asked this all the time… I know I do…. What do you think, are we in a housing bubble?
Let’s talk about inventory… You always hear about 2008 and people tend to compare the two markets. What’s your take on it?
Now what about equity? People are making out like bandits right now.
How about credit score? And financing? Are things more strict? Are your buyers having success competing on bids with traditional financing?
Hey Big Red, my name is Nancy and I have a question for you about the state of the current market. I can’t believe what houses are going for these days in my neighborhood! I have begun seriously thinking about selling so I can take advantage of cashing out while things are still hot. The only challenge I see is how few homes are actually available for sale. I keep asking myself, “Where will I even go? There’s nothing for sale and I’ll only end up overpaying…” So I find myself staying put even though I’d love to make the kind of money that’s out there for the taking. Do you have any advice for people like me, who are on the fence?
And now it’s time for our Market Analysis segment of the show…
According to an article here on CNN Business written by Mark Zandi - chief economist at Moody's Analytics.
Home sales, homebuilding and especially house prices have surged.
Despite being overvalued, there is no sign the housing market is in a bubble. (A bubble develops when there is speculation, or when buyers purchase homes with the sole intent of selling quickly for a profit, which isn't happening today.) But stress lines are beginning to appear, and the housing market is set to cool off.
The increase in home prices is stunning. Nationwide, house prices are up double digits over the past year, and this comes after a decade of solid price gains since the housing market bottomed in the aftermath of the financial crisis. Indeed, the median existing home price is closing in on $350,000, almost double what it was a decade ago.
Think about the return you would have earned if you had the gumption to buy the median-priced home at the bottom of the market after the financial crisis, say with a typical 20% down payment. It comes to an approximately 560% return.
There simply aren't enough new homes right now to meet demand, and the vacancy rate for homes for sale has never been lower. Home builders have been slow to put up more homes, especially at lower price points, given more restrictive zoning since the financial crisis, and much higher labor and material costs recently.
The house price gains are powered by the collapse of fixed mortgage rates to record lows during the pandemic. They have risen a bit in recent months, but they are still below 3%, making them extraordinarily attractive. Since most homebuyers purchase as much home as their mortgage payment will allow, lower mortgage rates quickly juice up demand and house prices, particularly when there is a shortage of homes.
Further superchargin g house prices has been the pandemic-fueled work-from-anywhere phenomenon. This has driven apartment-dwelling households in the nation's biggest cities to move to homes in the suburbs, exurbs, and smaller towns and cities. New Yorkers and Californians, who are used to outsize house prices, viewed much lower prices in smaller communities as bargains, even though they paid much more than any previous buyer had.
The federal government's yeoman efforts to shore up the single-family mortgage market during the pandemic also bolstered the housing market and home prices. The foreclosure moratorium and the forbearance on government-backed mortgage and student loan payments have forestalled distressed homes sales, which typically are sold at big price discounts, and thus weigh on house prices.
But stress lines are beginning to show in the housing market. Home prices have risen so far, so fast, that they have become overvalued. Nationwide, house prices appear overvalued by approximately 10% to 15% when comparing price-to-income or price-to-rent ratios with their long-run historical averages, according to my analysis. Some markets, mostly in the South and West, are seriously overvalued — by more than 20%.
Overvalued housing markets are vulnerable to a meaningful price correction as mortgage rates eventually rise. And they will. The Federal Reserve thinks the economy is set to quickly return to full health and is signaling that it will thus soon begin to normalize interest rates. Moreover, work from anywhere, while likely a fundamental change in the way we live and work, is also sure to partially unwind as companies ask their employees to come back into the office. And the foreclosure moratorium and mortgage and student loan forbearances are set to expire in coming weeks.
Housing demand will thus weaken. House prices will adjust. Not that there will be broad-based house price declines; that still seems a small threat. That would require a significant increase in mortgage defaults and distressed sales, which is unlikely given the improving job market and generally tight mortgage underwriting standards since the financial crisis.
Moreover, the housing market isn't in a bubble. Unlike the housing bubble we saw prior to the financial crisis, house flips, defined as an arms-length sale within one year of the previous sale, remain low, according to my analysis. And much of the flipping that is happening is by investors purchasing older homes, particularly in older Northeast and Midwestern cities, renovating them, and then quickly selling.
But house price gains are sure to cool off, a lot. There may even be some modest price declines in the most hyped-up high-end parts of the housing market, in second- and vacation-home locations, and in smaller and midsize cities that have seen the biggest influx of work-from-anywhere households. And while being a homeowner is generally better financially than being a renter, homeowners shouldn't count on the outsize returns they enjoyed in the past decade to come anywhere close to repeating in the coming one.
If you want more information about home loans or to get in touch with Matt:
Matthew Boyce
Executive Vice President, EVP
Garden State Home Loans, Inc.
NMLS# 218534
O: 856.353.3116 C: 609.790.1722 F: 856.353.3116
2091 Springdale Rd. Suite 16, Cherry Hill, NJ 08003
On Instagram: @matt_boyce and @gardenstateloans
On Facebook: @YeahBoyce and @GardenStateLoans
Links mentioned on this episode:
https://www.cnn.com/2021/06/29/perspectives/housing-market-pandemic-economy/index.html