By Teresa Kuhn, JD, RFC, CSA
This micro “house” in Brooklyn, NY, built from a tool shed, was recently listed on Tulia for $500,000…
Will 2016-2017 see a repeat of the housing meltdown that pulled our economy into a recession and destroyed millions of dollars of Americans’ wealth?
I’ve been looking at the trends lately and am seeing a disturbing amount of irresponsible practices creeping back into the marketplace; practices that directly contributed to the bursting of the last bubble.
The idea that a housing bubble is barreling down on us is controversial, to be sure. Real estate industry insiders say that even though standards have loosened a bit lately, they are nowhere near what they were in the days of stated income and no down payments.
There is a lot more documentation and a whole new set of requirements and hoops that must be navigated prior to purchasing a home, they claim. However, I have observed some unsettling trends that I believe will ultimately lead to another marketplace crash in the near future.
Loans are getting easier to get
Standards are once again loosening up with risky loans disguised as something innocuous. Many of these loans are, in fact, the same highly risky, subprime-style loans we had during the meltdown. The only real difference is now they are now being made with government (taxpayer) guarantees rather than originating with private investors. In spite of being coated with government promises, these loans reek of risk.
Mortgage software company Ellie Mae recently reported that the average FICO credit score of an approved home loan plunged to 719 in January, 2016 down from 731 a year earlier. This figure is well below the peak of 750 in 2011. Lower FICO scores, of course, correlate directly to higher risk of loan defaults. This is a dangerous sign that lenders are continuing to loosen underwriting standards.
Home prices are rising a lot relative to income
For the past few years, home prices have been rising about 5%-6% a year, but incomes are growing at only about 2% or 3%.
What does this mean? It is a tell-tale sign that housing affordability is worsening. As fewer people can afford homes various players in the housing market have a lot to lose and are pressured into relaxing lending standards even further to preserve the illusion of growth.
On the other hand, construction of new housing units over the last four years is at around half the pace of the bubble year construction. This lack of supply pushes home prices well above people’s ability to pay.
Flipping is once again a hot pastime
Another sign that the real estate market is teetering on the brink of collapse is the resurgence in popularity of real estate speculation and home “flipping”.
Flipping is once again trendy and hitting levels not seen since just prior to the last mortgage crisis. In 2015, almost 180,000 homes were sold and then resold last year — the highest level since 2007. Frenzied flipping in metro areas such as New York, San Diego, and Miami is actually exceeding peaks set back in 2005. Low interest rates and easier credit once again make this possible.
Conclusion:
After researching current real estate market behaviors and seeing history repeat itself, I can’t help but side with economist and demographer Harry Dent.
Writing in Economy and Markets Dent observed:
“… I’m predicting net housing demand will fall – even turning negative over the next two decades – especially starting later this year. This critical demographic indicator shows it won’t turn positive again until after the year 2039 – 23 years from now. The same indicator explains why the echo boom in Japan never caused a bounce in housing even after its all-time bubble highs and 60% crash.” (http://economyandmarkets.com/markets/housing-market-markets/the-dumb-moneys-at-it-again-always-the-last-sad-sack-to-the-party/)
