Detailed Discussion Through Three Charts Showing This Isn’t A Housing Bubble
As we are aware that the prices of homes are increasing exponentially, some people have started wondering if we are again in a housing bubble like earlier in 2006. To prove this false assumption let’s take a close look at the market data :
1. The housing market is not in the hands of risky mortgage loans.
Yes! Like earlier in 2006 when everyone was qualified for a loan, the scenario is different this time. According to Mortgage Credit Availability Index (MCAI) from the Mortgage Bankers’ Association there is an evidence mortgage money presence. It is known that the more you raise the index, the more it becomes to obtain a mortgage. And hence as a result the MCAI has become 378 in 2004 to 869 in 2006. Today, the index stands at 130. Now, further let’s have a look at the volume of mortgages that took birth when buyers had less than a 620 credit score by observing the difference between the present and year 2006.
Dr. Frank Nothaft, Chief Economist for CoreLogic has further recapped a point that big differences can be observed in today’s run up in prices if we compare it from year 2005. He said that it was a bubble fueled by risky loans and relaxed underwriting. In the present time, high risk features are absent from the loans and mortgage underwriting is sensible.
2. Homes are no more ATMS for the homeowner’s.
During the housing bubble period people in order to gain profits and hefty cash used to refinance their homes and pull out large sums of cash from the value. But as soon the prices began to crumble people came into a negative equity situation.
Today, homeowners are letting their equity build. Tappable equity is a term referred to the amount present for the homeowners to have right of entry before hitting a maximum 80% combined loan-to-value ratio but still leaving them with at least 20% equity. In 2006, that number was $4.6 billion and now it's $8 billion.
Yet, the percentage of cash-out refinances (where the homeowner takes out at least 5% more than their original mortgage amount) is half of what it was in 2006.
3. The time supply and demand is all that matters.
Up to 2006 a unique fear named FOMO (The Fear Of Missing Out) was prevalent all over the housing market which further surged the buyer’s demand. At that time over seven months supply of existing housing inventory was available as all homeowners were listing their homes resulting in more housing supply. Today, the count has decreased to barely two months.
During the housing bubble builders were also continuously involved in building projects which eventually declined in the next few years. According to Sam Khater, VP and Chief Economist, Economic & Housing Research at Freddie Mac, also states that this pullback is hence one of the reasons for lack of available inventory today. He said that the main reason for housing fall has been the long term turn down construction of single family homes.
Further is a chart that calculates Khater’s remarks:
We can say that in present times home supply is relatively low as compared to its demand.
Bottom Line
This market run-up is not similar to the year 2006. Bill McBride, the author of the prestigious Calculated Risk blog, beforehand forecasted the last housing bubble and its break down. For today’s housing market he has said that he doubts that things will slow down in the future. As all the fundamentals are already available so hence he has no remarks on it. He also said that demand will be soaring as millennials need houses. So hence prices will also rise as the inventory is on low.
