Q&A


Eyal Tropen - Sr. Loan Officer

NMLS # 874253

Similar to 2006-2007, some areas are experiencing very rapid house price appreciation. Topping this list is Greater Seattle. When this happened in 2007, a crash soon followed... so

 Are We in Another Real Estate Bubble?

11/14/2017

The short answer is "probably not"... Let's start with a quick history lesson:

 

The Forces Driving to the 2007 collapse

In a press release on Sept. 2, 2004, President Bush drew the outline to a new policy to increase homeownership in the United States. His call to the Federal Government "including the, Federal Home Loan Banks, the homebuilders, and the mortgage and finance industry to join with Federal, State, and local governments to help America meet the goal of increasing the supply of affordable housing" opened the door for legislation for deregulation of the mortgage lending industry.

Other forces were at play as well. The Western world was just starting to recover from the tech bubble burst and the recession of the early 2000s, which led the Federal Reserve to maintain unusually low Prime Interest Rates. At the same time, developing countries succeeded in amassing large monetary reserves, which pushed global interest rates to declined even further to record low levels.

As investors grew frustrated with low returns, they began to assume more risk, and found fertile grounds in the US deregulated mortgage industry.

The result was exactly what President Bush called for - an increase in home ownership, but not in the way he intended... There were some unforeseen consequences. Many unscrupulous lenders started removing all barriers to mortgage approval, sometimes allowing borrowers to use false pretenses, and relying on the lack of a robust audit process, they began offering what we now call Sub-Prime Mortgages.

  • They allowed low-income borrowers to untruthfully claim a higher income.
  • They allowed borrowers with no assets to untruthfully claim they do.
  • They over-utilized the Adjustable Rate Mortgage and Interest Only ARM programs to temporarily reduce monthly payments for borrowers, claiming that they "can always refinance"... (famous last words...)

It became so easy to get a home loan, that housing demand shot through the roof, pushing home prices to record highs. As home values went up, people started treating their homes as "piggy banks", perpetually refinancing, taking more and more equity out - and spending it(!).

However, like most wild parties, this one was also destined to end… Most of these Sub-Prime-Mortgages had low introductory rates, and/or interest only periods of just 3-5 years. , As they started reverting to regular interest rates, an ever-growing number of homeowners found themselves unable to make the much higher payments, and started defaulting on their debts. As the wave of foreclosures grew, so did the supply of houses dumped on the market, causing a rapid collapse in house prices.

 What is Different Today?

Seattle currently enjoys (if that's the right word) the fastest population growth in the United States. Some other cities are not far behind, such as Dallas & Austin TX, Portland OR, & San Francisco, CA.

Are you in a Pupular State?
Are you in a Popular State?

In an interview with the Seattle Times, Melissa Klinnert, a longtime broker with Steve Kennedy Team on Queen Anne, said "the influx of people moving in with high-paying jobs, especially in the tech industry, is contributing to strong sales and low inventories". Last year the Seattle metro area saw a net population gain of almost 6,000 a month(!) according to Census data, yet fewer than 2,200 new building permits are issued each month (a number which includes conversion of existing homes). This gap is what's driving home prices to new records.

Construction up, but not keeping up with demand...
Construction up, but not keeping up with demand... 

The other considerable difference from the 2007 collapse is in the mortgage industry. New government regulation that was introduced after the last crisis, as well as lenders’ self-imposed restrictions, ensure that every mortgage issued today must go through the "Ability to Repay" scrutiny - trying to make sure that homeowners will be able to afford their homes and keep up with mortgage payments and other costs for the long term. This makes it harder for some people to qualify, with much more documentation and paperwork than before, but helps protect lenders and their clients from the irresponsible mortgage lending that led to the 2007 housing bubble  .

                                  Credit is Harder to Get   Households Borrowing is Up, but NOT Mortgages
Households Borrowing is Up, but NOT Mortgages                                                                             Credit is Harder to Get  

 

How High can Prices Get?

That's a harder question to answer...

For people coming to Seattle from the Silicone Valley, house prices appear very reasonable. People coming from other areas are often shocked, but those who come here for a well-paying high-tech job, soon find that they can still afford to buy a home. Foreign investors are keeping the pressure up as well... After driving up prices in Vancouver BC to the point that the Canadian Government started intervening with extra taxes on foreign investors, they have turned even more attention to the Seattle market. For many others, it's becoming a game of "Drive till you Qualify" - having to look further out in the suburbs, trading travel-time in our worsening traffic for more affordable housing...

Huge Influx of Foreign Buyers
Huge Influx of Foreign Buyers 

Lakes, wetlands, and sensitive conservation areas crisscross our region, limiting the amount of vacant land that can be developed. Every new neighborhood popping up adds strain to our infrastructure - adding congestion to our roads, requiring more water, sewage, electricity, schools, hospitals, and more. Living close to employment centers and other amenities comes with a growing premium, and that will not end anytime soon... 

Finally, since builder profitability is highest with large and luxury homes, so fewer starter homes are being built than ever before - keeping the upward pressure for first-time-homebuyers, low and middle-income families, and the elderly who are looking to downsize.

Construction - Bigger Houses Only
Construction - Fewer Starts, but Mostly Bigger Houses  

 

 
 Graphs courtesy of Elliot F. Eisenberg, Ph.D., GraphsandLaughs, LLC, www.econ70.com

 



Copyright © 2018. Eyal Tropen NMLS # 874253
Residential Mortgage Loan Originator Licensed in CA, OR, TX, WA

American Pacific Mortgage | NMLS #1850
625 4th Avenue, Kirkland, WA 98033 | NMLS # 1055557
Phone: 425-922-1055 | Fax: 855-549-8730 
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