5 Warning Signs for the real-estate market

Beware of a recall of the mid-2000 housing bubble

Prior to the time when the bubble burst back in 2008, several activities in the real estate industry have already been seen.

Exerts in the Real Estate strongly believe that the current housing boom is far safer than the previous one, referring to the stronger lending requirements.

However, here are trends that correspond to the economic crunch in 2005 and 2006, ranging from home prices to the construction activities.

The words, “since 2005” have been repeated continuously by house-market monitors when in fact, they should be referring it to “since 2006.” Now, both are just equally worrying since the two refer to the height of the housing bubble.

Low mortgage rates fueled by a huge demand, propelled a already supercharged rally for US housing over the last year. A lot of Americans took advantage of the current situation and grabbed nearly all available supply of both new and previously acquired properties and homes amid the huge population shifts from cities to the suburbs.

After the economic downturn, chronic underbuilding left contractors and real estate developers struggling just to meet the new demand with enough supply. That disparity has since pushed the selling prices exorbitantly.

The chaotic and frantic nature of the boom has led a lot of people and American consumers to compare the current market situation to what happened just before the 2008 bubble burst. Experts in this field have been fast in explaining, that while some resemblance exist, the current price surge has to do more with a lack of inventory as compared to the dubious lending standards.

The Federal Reserve Chair, Jerome Powell said, “I do not see the kind of financial stability concerns that really do reside around the housing sector.” Powell added,

“We do not see bad loans and unsustainable prices and that kind of thing.”

However, just because the market looks a bit different on a macro scale, it does not automatically mean that there are no strong semblances to the time just before the infamous 2008 crash. Here are five housing-market signals mirroring the same signs we all have seen 15 years back.

1) CoreLogic Home Price Index

Price index is perhaps the most basic indicator of just how much demand has exceeded supplies across the country.

According to a report, the headline price gauge for housing-data authority CoreLogic rose to about 11.3% year-over-year in March. This marks an acceleration from the rate of just 10.4% last February and the fastest rate of price increase since March 2006. Basing on a month-over-month bases, the prices spiked to 2% from their February levels.

CoreLogic sees that the current momentum will eventually cool over the next coming year. The financial analytic firm also said that the persistent wearing-away of home affordability will most likely cut back some purchases, and accelerated constructions will most probably shore up supply in the coming months.

Frank Martell, president and CEO of CoreLogic Home Price Index said that a year-over-year price should reach about 3.5% as persistent demand keeps the rally alive.

“With prospective buyers continuing to be motivated by historically low mortgage rates, we anticipate sustained demand in the summer and early fall,”   Martell further added.

2. S&P CoreLogic Case-Shiller Index

A home-price inflation measure that focused more on American cities have recently scored a somewhat similar reading. In the metro and in cities, home prices increased 12% year-over-year in February according to the S&P CoreLogic Case-Shiller Index.

S&P CoreLogic Case-Shiller Index had been the leader when it comes to US Homes prices for more than 30 years. The reading signals the strongest price growth since the economic downturn, and is slightly higher from the previous annual gain of about 11.2%. Inflation was also broad-based. 20 cities have also witnessed a climb in home prices, and 19 cities saw a year-over-year price growth rose quickly from January to February.

According to the data gathered by S&P CoreLogic, the prices accelerated the most are found in Phoenix, San Diego and in Seattle.

3. Selling Prices for New versus Previously Owned Properties

Going deeper into the whole home sales exposes an unusual phenomenon that was not seen previously since the prior boom. For the first time since 2005, a lot of Americans buys previously owned single-family homes. This is according to the Census Bureau and the National Association of Realtors who also said that the March housing data shows Americans spent more on this type of homes as compared to newly constructed ones.

This reveals that more and more Americans are prioritizing purchasing any available homes instead of buying a newly constructed unit.

Without a doubt, the monthly sales data is volatile and the premium for newly built homes could come back by April data. However, with the supplies still under pressure and CoreLogic’s report revealed that prices broadly inched higher last month, and the trend might linger a bit longer than anticipated.

4. Home Starts

As indicators of market demand peaked to a 15-year highs, measures of upcoming supplies have likewise soared. Housing starts climbed about 20% in March. This is after contractors accelerate to solve the lack of new home sales available for sale. The jump places the yearly rate of starts at its highest since 2006. This also serves as the largest month-over-month gain since 1990. Also seeing a climb are permits for new residential construction, although at a rate slower than expected.

A series of winter storms also drove the rebound, cutting down construction activities in February. However, for the most parts, a significant shortage of available home units stimulated the growth in construction. In March, up for grabbed were about 1.7 million existing homes. And with the current purchase rate, that sum can most likely be snapped up in just a couple of months.

The pandemic has also slowed down the homebuying activity, giving a slight relief to contractors who could have more time to meet the demand. With a lot of millennial are hitting peak homebuying age and lumber prices are expected to dip further, economists see the rebound in construction and building can pave the way for a more sufficient price growth.

5. Home Equity Take-Out

Home owners are taking out their equity citing the continuous acceleration of home price growth. This rate mirrored the same activity that happened in the mid-2000s.

Homeowners who are refinancing their mortgage loans reportedly pulled out about $50 billion equity out of their homes. According to the data coming from Freddie Mac and the Urban Institute, about $50 billion equity has been taken out by homeowners who were refinancing their mortgages. And this ran throughout the fourth quarter of 2020.

The rates of mortgages are still at a very historic low. These rates were reversed to their pandemic-era dip into the first quarter as investors braced for the economic upturn, paving the way for a much higher borrowing rates. As part of Urban Institute’s report which published recently, the higher rates expunged the rate reduction incentive intended for refinancing, making equity take-out the main reason to refinance.

On its own, equity take out is basically normal, however the sharp increase last year could be a cause of concern. The Federal’s ultra-accommodative policy which pushes risk-taking all over the market was highly criticized by some economists. Increased equity take-out can turn to new financial hazard for participating homeowners. From a very high pricing level, a decline in the value of their homes could cut deeply into their balance sheets.

And while this still stands at its 2005 level, equity take-out is still well below the peak which occurred in 2006. However, with the mortgage rates seen to climb over in the next few years, take-out refinancing could also speed up further.