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The housing market is on much more solid footing. Real estate has been a preference for investors seeking a safe haven for money they won't need for at least ten years. There are so many positive factors in favor of the housing market. Low interest rates, solid stable mortgage market, help for first time home buyers, lower oil prices, and record breaking job growth.
5 reasons a 2007-style real estate meltdown is unlikely now
Published: Jan 10, 2016 10:26 a.m. ET by Daniel Goldstein
When it comes to investing in the stock market, you may lose your
shirt, but you probably won’t lose your home. In fact, when the equity
market gets rough, real estate tends to be a life raft for investors
seeking safety.
“Real estate is Americans’ preferred investment
for money that they won’t need for at least 10 years and that hasn’t
changed,” said Greg McBride, chief financial analyst with New York-based
Bankrate.com. “Nervous investors always look to real estate rather than
shy away from it in times of volatility.”
While stocks around the globe are off to a rough start in 2016,
it doesn’t necessarily mean déjà vu all over again, at least when it
comes to a repeat of the real estate tumble that began in 2007 but
accelerated sharply following the 2008 rout of the equities market, when
home prices in late 2011 were down more than 20% from their peak in
spring of 2007.
Here’s why you shouldn’t be panicking if you’re looking to buy or sell a home:
Interest rates should stay low
With
the latest bout of declining equities, the pace of further Federal
Reserve rate increases is likely to slow, according to Kevin Finkel,
senior vice president of Resource America Inc.
REXI, -4.94%
, a real-estate investment
trust in Philadelphia. “It would take a lot more than the volatility
we’re seeing now for them to get knocked off the current course of
raising rates, but will they slow down [coming rate hikes]? Probably.”
The
Federal Reserve raised interest rates a quarter point last month, the
first time since 2006, but minutes from the Dec. 15 to Dec. 16 meeting
showed that not all of the bankers were completely on board with the
initial rate hike, despite the unanimous vote, because of concerns over
inflation being less than expected.
The
Fed isn’t “chomping to follow up last month’s rate hike as early as
this month, or possibly even in March unless the economy, and possibly
inflation, shows more spunk than shown recently,” said Sal Guatieri, a
senior economist at BMO Capital Markets in Toronto.
While the
refinancing boom has slowed, that’s only because the majority of
Americans who could refinance to a fixed rate have already done so, so
the impact of “rate-shock” when short-term adjustable rate mortgages
(ARMs) readjust will be minor compared with what happened between 2007
and 2012, when many Americans could no longer afford their new housing
payments and defaulted.
Currently, despite an increase in bank
repossessions rising almost 60% in November 2015 compared with a year
earlier, the percentage of loans in foreclosure nationally is the lowest
level since 2007, according to the Mortgage Bankers Association.
Foreclosures reached a peak of 4.6% in 2011 at the height of the real estate bust.
“The
recent rise in bank repossessions represents banks flushing out old
distress rather than new distress being pushed into the pipeline,” said
Daren Blomquist, vice president of Irvine, Calif.- based RealtyTrac, a
real-estate research company.
There’s less risk of a new mortgage bubble
Unlike
the 2005 to 2012 mortgage meltdown, when so-called liar loans and
exploding ARMs flooded the market, the subsequent pullback in credit may
have been overly tight, but it does mean in 2016 there are fewer real
estate bubbles waiting to pop. While it’s true there are markets that
have seen incredibly inflated real-estate values such as San Francisco
and New York, it’s not fueled by unsustainably loose credit standards.
“The
changes that have taken place over the past five to seven years have
built a more stable foundation” in the mortgage industry, said Michael
McPartland, a managing director and head of investment finance for North
America at Citigroup’s
C, -6.41%
private bank. “There just
aren’t a lot of the exotic products like interest-only [loans] and
super-high loan-to-value [mortgages],” he said. “If things slow down,
there will be a contraction, but not a pop.”
McPartland says it
may be harder for borrowers to afford a 20% down payment and monthly
interest payments that are principal and interest, instead of just
interest-only, but the flip side is increased home equity (the national
average is 30% equity), so home buyers are less likely to leave the keys
on the counter and walk away if things go bad. Foreclosure starts in
July of just over 45,000 were the lowest level since November 2005,
nearly a 10-year low, according to RealtyTrac.
Foreclosure
starts in November 2015 of just over 36,000 were the lowest level since
December of 2005, near a 10-year low, according to a Dec. 10 report
from real estate data firm RealtyTrac. “What we can expect is for
foreclosures to continue falling as banks clear through their backlog of
inventory,” Matthew Gardner, chief economist at Windermere Real Estate
in Seattle, told RealtyTrac last month.
Help for first-time home buyers
Last
year, the Federal Housing Administration began reducing mortgage
insurance premiums on loans by an average of $900 a year, in an effort
to nudge first-time home buyers and millennial borrowers who might not
have much cash for a down payment to finally enter the housing market.
The effort appears to have worked, with FHA loans jumping to 23% of all
financed purchases in the second quarter of 2015, up from 19% a year
earlier, according to RealtyTrac data. The FHA and other federal moves
to increase credit, along with a strengthening economy, may just help
boost the market for new mortgages in 2016 as much as 10% over last year
despite the increase in interest rates, Mike Fratantoni, the chief
economist for the Mortgage Bankers Association, said in December.
Those
other federal moves include Fannie Mae and Freddie Mac making lower
down payment loan options available to more borrowers. In 2014, the
agencies began to buy loans with just a 3% down payment, or 97%
loan-to-value ratio. Fannie Mae also announced in 2015 that it would
allow income from a non-borrower household members to be considered as
part of a loan applicant’s debt-to-income ratio. That could help some
borrowers, who might have family members on Social Security or
disability living with them, or a renter in a basement apartment, to
boost their income levels and help them qualify for a loan.
Lower oil prices
At the end of 2008, gasoline prices, which had risen to a record $4 a gallon nationwide that summer, had crashed to under $2 a gallon. In that case, the cheap gas (and diesel) wasn’t a good thing, as the worldwide economy was shuddering to a halt.
While
China’s economy is still contracting, the U.S. economy isn’t, so the
lowest gas prices since 2009, with the national average now under $2 a
gallon, are likely to help the housing market.
“The
continuing drop in gas prices is freeing up valuable disposable
income,” says Resource America’s Finkel, which can help Americans absorb
higher rent payments, or move up to a more expensive property.
Job growth
While
jobs typically are a lagging indicator of an economic downturn, the
U.S. has had a slow but steady rate of job creation for the past five
years. Even with weakness seen during the summer, job gains in 2015 will
top 2.5 million, making it the second-best calendar year for U.S. job
growth in this millennium, after last year’s 3.1 million. The last time
more jobs were created in a two-year period was at the height of the dot-com boom, in 1998-1999.
“The
economy continues to create jobs, and the quality of jobs being created
has improved as the economic recovery has progressed, with professional
and business services leading the way,” said Bankrate’s McBride. “This
is indicative of an economic recovery that is sustainable.” And while in
this economy, wages have been slow to recover, and it’s been a
challenge to get long-term unemployed Americans who no longer count in
the official jobless statistics to return to the job market, the job
growth has been good enough to boost the housing sector and lure
millennial borrowers off the fence.
“If wage growth materializes
in a broader way, this will be the catalyst for many existing homeowners
to put their homes on the market and finally look for the move-up buy,
boosting housing and alleviating the inventory shortage,” McBride said.
Source:
http://www.marketwatch.com/story/5-reasons-a-2009-style-real-estate-meltdown-is-unlikely-now-2015-08-25?mod=realtor
