Is Another Housing Bubble Forming

Housing_Bubble_articleA lot of forces came together in the early 2000s to fuel the US housing boom while putting it at risk of its ultimate crash.  Two trends related to loose lending standards stand out: 1) lots of new homebuyers were able to get mortgages, and 2) many of those new borrowers were able to do so by putting very little money up front. Combining these two forces, you got a massively leveraged housing market.

After the housing market bust we experienced  in 2008, many experts have been quick to warn that a new bubble may be forming in some areas of the country. There’s not yet a bubble, despite factors reminiscent of the last housing bubble, including low interest rates and somewhat lax rules on down payments for first time buyers. But this is no longer the case. And this lower leverage may be the most important difference between the housing market today and the housing bubble because it reduces the risk of a major downturn.

The biggest challenge facing the housing market right now is the lack of inventory available for sale. Prices are determined by supply and demand. If prices continue to outpace inflation and income in these areas, that can eventually become a problem. Right now buyer demand is out-pacing seller supply, across many price ranges, driving prices up.Current homeowners list their home to either trade up or downsize, opening up inventory for first-time buyers to come in. One can’t happen without the other. But current homeowners aren’t flooding the market with “For Sale” signs. Some are worried they won’t be able to find a new house or they’re still waiting to recoup their home’s value lost in the crash.

If you are a homeowner debating listing your home for sale this, now is the time, meet with a local real estate professional who can guide you through the process.

Hybrid ARMs Dominate Mortgage Offerings

hybrid mortgagesHybrid ARMs continued to be the most popular loan product offered by lenders and chosen by ARM borrowers according to Freddie Mac’s 30th Annual Adjustable-Rate Mortgage (ARM) Survey of prime loan offerings, which was conducted January 6 to January 10,

Homebuyers have preferred fixed-rate mortgages the past few years because of the low interest rates and the certainty of the monthly principal and interest payment. As longer-term rates rise, ARMs with their lower initial interest rates will become more appealing to loan applicants. Hybrid ARMs are particularly attractive because they have an initial extended fixed-rate period of 3 to 10 years — and then adjust annually thereafter. Nearly all of the ARM lenders participating in the survey offered a hybrid. The 5/1 hybrid (a five-year fixed-rate initial period before the rate resets annually) was by far the most common, followed by the 3/1, 7/1 and 10/1. Far less common were ARMs where the re-pricing frequency was fixed for the life of loan, such as a one-year adjustable, a 3/3 ARM (which adjusts once every three years), or a 5/5 ARM (which adjusts every fifth year).

Banks are definitely doing more ARMs because they’re selling the consumer what they’re asking for, which is a lower monthly payment. In early January 2014, the interest rate savings for the 5/1 hybrid ARM with a 30-year term — the most common ARM offered in today’s market — compared to the 30-year fixed-rate mortgage amounted to about 1.36 percentage points. For a $250,000 loan, the monthly principal and interest payment on a 5/1 hybrid would be about $194 less than on the 30-year fixed-rate loan over the first five years of the loan.

Many borrowers with adjustable-rate mortgages were among the first to default during the downturn. When their rates adjusted after an initial teaser period, they were unable to refinance and got stuck owing sharply higher payments. This time around will be different, lenders say, because underwriting standards are tougher for hybrid ARMs, so borrowers will be less likely to get squeezed when interest rates reset. Moreover, regulators have all but banned the interest-only and balloon payment features that made ARMs ticking time bombs during the financial crisis.

For many, it makes a lot of sense to take a shorter-term mortgage, If the borrower is in a situation where they’re not going to be in that home for more than seven years, it would be incorrect for them to take the fixed rate when the ARM is giving them a benefit of lower monthly payments.