With interest rates increasing and home prices seeming to skyrocket, many people are fearful that the real estate market is heading for a big bubble burst or a gigantic crash. But learning from housing market crashes of the past, there are four major signifiers that help to determine a crash is on the way.
Let’s take a look at these four major factors that signify an unavoidable housing crash and see why we are currently not headed for one.
There is an Overabundance of Homes for Sale
In 2007 California had about 3 million houses available for sale, right now there are fewer than about 400,000 active listings. This is a huge decrease in the supply of homes available and the demand from buyers has lessened slightly with an increase in mortgage interest rates, but it is still at a significant level.
The current average mortgage interest rates are still far below where they were in 2007 when we saw the last real estate market catastrophe. Back then the average mortgage interest rate was a whopping 6.375%. Right now, the average interest rate is hovering around 4%.
Affordability
This one factor out of the four major factors is what has several people hesitant about the future of the real estate market health. Affordability of homes is taking a hit as compared to the last three or four years. The driving factor that some people neglect to realize in the current affordability of homes across the nation is that while some markets are seeing an affordability issue there are still several markets that are not.
Areas like Riverside County California are seeing a significant increase in wages. In fact, this area alone is one of the fastest and most promising in terms of growth for a wage increase. The increase in jobs and wages has helped homes to stay within an affordable range.
Since many people do not use 100% of their income to pay for their housing the lower increase percentage of wages as compared to the percentage of increase in home cost actually ends up being about the same. In some areas with the highest wage increases, housing costs become more affordable.
Mortgage Financing Offered Declines in Quality
In 2007 there were several mortgage companies easily handing out loans to the most questionable of borrowers. Because of those loan practices today there are laws in place that require mortgage companies to make sure they have done their part to solidify a buyer’s capability of repaying the loan. About 70% of loans issued just before the last market crash were given to borrowers not stable enough to repay the loan. Today mortgage qualifiers are much stricter, even on non-conventional and non-QM mortgages.
The Average Type of Homes Most People Are Buying
80% of homes purchased today are being purchased for use as a primary home by an average everyday buyer. In 2005, 2006, and 2007 about 40% of all homes sold for being sold as rental properties. There was a large increase in the interest of young people investing in real estate hoping to make it rich by renting. These purchases were being made through loans that required very little money down and were very easy to qualify for.
The four factors above are currently not present in today’s real estate market. Home appreciation is expected to slow in a myriad of areas across the country. Another factor in real estate markets is that each location can have different factors in itself. Though it is OK to look at the national average factors, they do not tell the actual story for your local real estate market.
Right now, we continue to have a low inventory of homes for sale and a large number of buyers looking for them as well as more responsible mortgage approval practices making sure that those purchasing homes are able to afford the payment for them.
For more information on your mortgage options in Mission Viejo and California please contact me anytime.
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