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Are We in a Real Estate Bubble? What Does the Fed Say?

Reasons for concern are clear in certain economic indicators — the price-to-rent ratio, in particular, and the price-to-income ratio — which show signs that 2021 house prices appear increasingly out of step with fundamentals.

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Right now is a critical time in real estate.

Since the pandemic, dynamics within our housing markets have been under a lot of pressure. The price of homes has risen dramatically and inventory remains extremely thin. Mortgage rates have also substantially increased, and they’re expected to rise further throughout the second half of 2022. Homeowners are undecided about selling for fear of not finding another home to move into, and buyers have found it nearly impossible to affordably secure a property.

Research by the National Association of Realtors indicated that the median price for homes sold in March 2022 was $375,300 compared to data from the previous reporting period when the median price was $350,300.

“Sellers and buyers are finding it extremely difficult to find a property as they’ve been hit by an unprecedented halt to available inventory and the recent spike in the prices of homes.”

Will another crash happen as in 2008?

The financial crisis in 2008 was considered to be the most significant economic event since the Great Depression of the 1930s. The Financial Services Modernization Act of 1999 (Gramm-Leach-Billey Act) and the Commodity Futures Modernization Act deregulated the financial system which allowed banks to invest in housing-related derivatives.

The Great Recession caused a huge drop in the housing market, which has taken many homeowners years to recover from.

Two years prior to the 2008 financial crisis, housing prices began falling for the first time in decades. This deflationary period in our economy welcomed new homeowners, rewarded real estate sales professionals and the real estate market became a hot trend. Many realtors applauded not taking into account the creditworthiness of new homeowners and the risky practices of lenders.

For instance, the Fed has twice lowered the rate to a range of 0.25 percent or less. Data shows that the first time was during the financial crisis of 2008 – further detailing that the Fed did not continue raising rates until December 2015. The second time was in March 2020 as a result of the global pandemic.

Investors and economists are seeing some similarities in the market today to those we saw in 2008, and wonder if another crash is on the horizon.

Researchers at the Federal Reserve Bank of Dallas warn of a coming crisis as this is the longest period of low-interest rates in U.S. history.

“Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s,” a group of Dallas Fed economists wrote in a widely cited report released in late March. “Reasons for concern are clear in certain economic indicators — the price-to-rent ratio, in particular, and the price-to-income ratio — which show signs that 2021 housing prices appear increasingly out of step with fundamentals.”

While many economists believe that the U.S. housing market is in a bubble-like stage, the Fed does not think that there will be another housing crash like the one that happened in 2008.

“Reasons for concern are clear in certain economic indicators — the price-to-rent ratio, in particular, and the price-to-income ratio — which show signs that 2021 house prices appear increasingly out of step with fundamentals.”

There are numerous signs that indicate that the housing market is about to pop. First, we have witnessed a severe lack of inventory. Additionally, appreciation in home prices is so high that it’s affecting some rural and almost all metropolitan areas. Most recently, the real estate market is being shaken by inflation and hikes in interest rates, making it harder to purchase or refinance a home.

Gigantic Increases to Home Prices

The price of homes has increased dramatically in recent years, impacting how home buyers and sellers trade real estate. Generally, the price of a house is affected by a number of factors. The main one is the demand for housing in that area. Oftentimes, a need arises due to work, and the desire to be close to family and friends. If there’s a shortage of housing, the price of houses increases.

Lack of Housing Supply

One of the biggest fears among homeowners is whether they will be able to sell their existing home for enough money to finance the cost of purchasing a new one. In addition to that, since the start of the pandemic, the housing market has experienced a shortage of new construction development. This shortage of new homes prompted many homeowners to avoid going on the market. A lack of inventory and rising home prices have ultimately made it difficult for people to find a home that they can afford. Other factors that affect the price of a house are interest rates and inflation.

Hikes in Interest Rates and Inflation

In March 2022, the Fed announced that they will be incrementally increasing rates by 0.25 percent. Borrowing rates have risen due to this interest rate change, which has led to an increase in borrowing costs for both consumers and businesses. The decision to raise interest rates was anticipated but the timing of it caught many homeowners by surprise.

Many Americans have already started to feel the effects of inflation and interest rates. Housing prices have increased over the past couple of years, but have slowed down in the last quarter. However, the cost of living is on the rise.

What Does the Future Hold?

Since the housing market is experiencing a massive boom, it’s only a matter of time before the bubble pops. If it does, it will cause a severe economic crisis. Some people believe the U.S. is headed toward hyperinflation due to past and possible future government stimulus behavior.

As the current economy is very different from the one that we saw during the Great Recession, there is some difficulty in accurately predicting what the future actually holds. But the fact that we’ve been through a depression and severe recession before tells us that there are some things that we can learn from our past experiences.

Real Estate

Affordable Housing: HUD and NAR to Tackle Crisis in America

HUD’s “Our Way Home” expects to advocate for zoning changes, and host roundtables to engage local and state officials to provide affordable housing solutions.

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Affordable Housing Crisis in America

The U.S. Department of Housing and Urban Development (HUD) has announced a new program designed to boost affordable housing and help the nation’s housing supply shortage.

The goal of HUD’s program is to increase the U.S. housing supply by aiding local communities in the growth and affordability of housing in their area, including rentals and homeownership. HUD’s “Our Way Home” expects to include several initiatives, like advocating for zoning changes, and holding roundtables to engage local and state officials to provide solutions.

The National Association of Realtors® (NAR) welcomed HUD’s announcement to combat the housing supply challenge.

“As NAR has long recognized, a collaborative approach that involves local partners is critical to building strong, thriving, and inclusive communities,” NAR President Leslie Rouda Smith said in a statement about HUD’s new initiative.

“‘Our Way Home’ promises to not only provide tools and resources necessary to address the supply shortages plaguing the country, but it will also improve vital HUD programs based on feedback gained through this effort.”

One of the largest Pandemics in history has led to a boom in housing. An estimated 80,000 homes worth $50 billion were purchased by institutional buyers in the fourth quarter of 2021, according to Redfin. Moreover, families are facing tougher competition from buyers who have a lot of cash and are securing single-family homes, converting them into rental properties.

With record-high home prices and ultra-low inventories, homeownership has become increasingly difficult to achieve, NAR citing that Americans of color and first-generation home buyers are affected the most. The U.S. will likely take over a decade to resolve a housing shortfall of over 5 million units.

In efforts to circumvent disadvantages among traditional homebuyers, NAR proposes to support increased allocations to foster new home construction, expanded financing opportunities, and tax incentives for investors to convert unused commercial spaces into residential units.

“The shortage of affordable housing has been growing for decades – but this is a solvable crisis,” says HUD Secretary Marcia L. Fudge.

“Across the country, we are seeing many communities ending exclusionary zoning, building affordable housing in communities that previously did not allow it. We are seeing communities use innovative building models and materials, and design homes that are sustainable and resilient. And we’re seeing communities tackle homelessness by building permanent affordable housing with services. These are the types of community wins that we want to elevate with ‘Our Way Home’ and encourage others to follow.”

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Real Estate

The Housing Market Is Cooling: Should Sellers Worry?

Signs that the housing market is cooling. Lumber costs, new and existing home sales, are all plummeting. Inventory is increasing, and homes are sitting.

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The housing market has been on a steady rise since bottoming out in 2008. Since the beginning of the pandemic, record surges in home prices have prompted many economists to calculate the imminence of a housing bubble. With real estate prices growing at a rate of four times the national average income, experts are now warning that the housing market is cooling.

A Housing Bubble?

Real estate bubbles occur when demand greatly outstrips supply, resulting in an escalation of home prices, according to Rocket Mortgage.  In like-markets, buyers are often forced to settle for limited overvalued properties.

By historical comparison, overvalued homes have a large effect on the housing market. In the past decade, the price of real estate increased steadily. Recently, workers were required to stay and work from home, indirectly affecting the valuation of properties during the Pandemic. In some places, like Miami and Austin, home values have surged so greatly that it has outpaced the national average.

In April, Realtor.com reported a slow down in housing demand. The real estate internet company realized an increase in inventory, citing that more homes have sold in 4 of the 5 weeks that ended that month.

What Does the Data Show?

CoreLogic, a real estate data firm, assessed that 67.9 percent of 392 U.S. regional housing markets were overvalued. With housing price reductions hitting several markets, the company now reports that only 24.5 percent of U.S. housing markets are normal and 7.6 percent are undervalued.

Among the 392 regional housing markets measured, CoreLogic has found only four markets to have a “very high” likelihood of a price drop: Bend, Oregon; Prescott, Arizona; Lake Havasu City, Arizona; and Bridgeport, Connecticut.

Opposing CoreLogic’s analysis, Moody’s Analytics believes that 96 percent of the 392 regional housing markets are “juiced-up,” stating the markets that are most likely to see price drops include: Markets in Colorado such as Colorado Springs, Fort Collins, Greeley, and Denver; Boise, Idaho Falls, and Coeur d’Alene, Idaho, Las Vegas; Jacksonville, Tampa, and Lakeland, Florida; Atlanta; Sherman, Texas; Longview, Washington; Charleston, South Carolina; Albany, New York; Clarksville, Tennesee.; Greensboro and Charlotte North Carolina.

In May, the average household income in the U.S. was $87,864, according to data by Zippia. Mortgage rates have been hovering at 5 percent compared to its 3 percent average rate in January.

Lumber costs, new home sales, existing home sales, and mortgage applications are all plummeting. Inventory is increasing, while homes sit in the market much longer, all indicative that the housing market is cooling.

The Housing Market is Cooling – Should Homeowners worry?

Naturally, the answer is no. However, a slow down in housing demand does indicate that home prices may not continue to rise at the same pace as they did since the pandemic. Additionally, while home prices are falling, there are still many areas that are undervalued.

Homeownership is a popular choice for many Americans. And although U.S. home prices have become more expensive than the average household income, experts suggest that the market will grow by another 5.9 percent over the next 12 months.

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Real Estate

Wall Street Investors: A Threat To The Housing Market?

Wall Street investors mobilize into the single-family housing sector, driving up the price of real estate. Thinking outside the box may help buyers compete.

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Wall Street Investors Snatch Up Real Estate in Bulk

The home-buying market is getting more competitive as Wall Street investors mobilize into the single-family housing sector, driving up the price of real estate.

Research by the National Association of Realtors indicated that institutional buyers accounted for 15 percent of residential home purchases in 2021. Texas had the highest fraction of purchases with a market share of 28 percent, followed by Georgia at 19 percent.

Moreover, eighty-four percent of states have seen an increase in the number of investors buying residential homes from 2020 to 2021, including Mississippi, Colorado, and Florida.

As families look to buy new homes, they’re facing tougher competition from buyers who have a lot of cash and are securing single-family homes to make them rental properties.

An estimated 80,000 homes worth $50 billion were purchased by institutional buyers in the fourth quarter of 2021, according to the latest data released by Redfin. Homes in the mid-priced range have gained popularity with investors, representing 32.3 percent of their purchases in the fourth quarter, up from 24.1 percent a year earlier.

Wall Street Investors Buy Real Estate in Large Quantities

While rental-ready opportunities garner the interest of investors, there are a number of other factors that attract deep pockets to a specific real estate market.

Markets yielding a 40 percent appreciation in the last decade and an average of 12 percent in sales activity are highly considered. Additionally, investors are attracted to markets where rents have increased more than 30 percent on average in the past decade and where households earn more than $60,000 annually.

Buyers are battling multiple offers as institutional investors storm through the competition.

Yesterday, U.S. Senators Elizabeth Warren (D-Mass.) and Jack Reed (D-R.I.), sent a letter to the Secretary of the Department of Housing and Urban Development (HUD), calling to preserve homeownership affordability for American families as Wall Street firms expand their activity in the housing market.

According to the letter, the market conditions are favorable for large investors. More than 75 percent of investor home purchases were paid with cash. Senators Warren and Reed suggest that:

“These investment activities will make home ownership less available and affordable for American families and jeopardize HUD’s ability to meet its mission “to create strong, sustainable, inclusive communities and quality affordable homes for all.”

Families are increasingly feeling the impact of rising housing costs and a lack of inventory, even as our market begins to swift.

There were more homes for sale in 4 of the 5 weeks that ended in April, according to Realtor.com. Experts say that as inventory increases, thinking outside the box may help buyers stay competitive.

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