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Realtor Market Insider August 30, 2021

August 30th, 2021 10:20 AM by Richard Sardella MLO.100007700/NMLS 233568


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Boom, bubble, or bust? History often offers clues

It’s hard to know. Is real estate in another bubble, are we at the crest of a peak, or have we simply hit a high water market that may not recede any time soon?

According to NPR’s Greg Rosalsky, even before the pandemic pushed the U.S. housing market into overdrive, the price of the average American home was on a rocket ride, climbing more than 50% between 2012 and 2019 — the third most explosive housing boom in American history. “Then came the pandemic, marked by a buying frenzy and a selling freeze, which created a supply-demand mismatch that made the price boom go into warp speed,” he says. “The average price of American homes, in real terms, is now the highest it's ever been — even higher than the peak of the housing bubble in 2006 before it crashed 60% and bottomed out in 2012.”

Trying to determine if we are in a bubble or near a crash, he cites new research performed by economists Gabriel Chodorow-Reich, Adam M. Guren, and Timothy J. McQuade that helps to explain the dynamics of our bonkers housing market, taken from a Planet Money Newsletter. “They find evidence that the price surge in the 2000s was indeed a bubble, which serves as a scary reminder that the housing market can go wild and crash. But they also find evidence that may provide some comfort to homeowners: Something real can explain the long-run upward trend in home prices.”

What is a bubble, anyway?

A bubble is defined as a time when the prices of assets — such as stocks and houses — depart from their fundamentals. Explains Rosalsky: “Fundamentals are what an asset is actually worth.” He justifies a house's fundamental value by taking location, jobs, climate, proximity to activities, schools, size of the homes and the architectural style that's in vogue. “Importantly, the fundamental value of a house is determined by the supply and demand for houses in a given area: If it's desirable to live in that area and there aren't enough homes for incoming residents, the fundamental value of each house will rise.”

Just the facts, ma’am…

So how do homes depart from their fundamentals? It’s a debate, according to Rosalsky, who says one side believes that homebuyers and sellers are rational (effectively processing information about home fundamentals before they buy or sell). And the other side thinks that quirks of human psychology lead homebuyers and sellers to misjudge the fundamental value of homes, leading to bubbles and crashes.

Using 20/20 hindsight, this new study looks at factors such as job growth and amenities that increased housing demand in local markets around the nation, including how hard it was to increase the supply of new homes in those areas to accommodate rising demand. Rosalsky reports that these fundamentals explain which places had the biggest booms, the biggest busts and the biggest rebounds. What are referred to as ‘superstar cities’ were studied — those which have seen roaring economic growth over the last few decades. San Francisco, Seattle, San Diego and Boston are places that have constrained supply, lots of growing industries and good jobs. This suggests this was a fundamentals-driven cycle.

More history:

Charles Kindleberger's book, Manias, Panics and Crashes, offers a sweeping history of financial crises — all the way up to the dot-com bubble in the late 1990s. It presents the idea that these boom-bust cycles start with some change in fundamentals — such as the invention and spread of steam-powered locomotives and the building of the transcontinental railroad (land values near train stops became more valuable overnight).

The problem is that investors began thinking that the sky was the limit. Over-speculation eventually led to reality kicking in and falling prices to ensue. When investors can’t pay their debts, a crisis follows. And this is a general pattern he finds repeated over and over in history.

Now to recent history: In 2008, a glut of foreclosed houses flooded the market, pushing prices down below their fundamentals. But, this also set up a rebound, explaining another housing boom after 2012 when the backlog of foreclosed houses had been bought up.

So what’s going on today?

While the economists' data does not include surging home prices of the pandemic era, the research helps us think about it within a rational perspective. “Demand for more space and hopes for continued remote work have made the suburbs more desirable,” says Rosalsky. So there may be a change happening once again, making fundamentals shift as well. However, there is also a lot of uncertainty about the future of remote work, and it's possible people are over-optimistic about these fundamentals.

NPR, PlanetMoney, TBWS

This Week's Mortgage Rate Summary

How Rates Move:

Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market.  This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events.  When MBS pricing goes up, mortgage rates or pricing generally goes down.  When they fall, mortgage pricing goes up.  Tracking these securities real-time is critical.  For more information about the rate market, contact me directly.  I’m among few mortgage professionals who have access to live trading screens during market hours.

Rates Currently Trending: Lower

Mortgage rates are trending unchanged this morning. Last week the MBS market was essentially unchanged. The MBS market was slightly volatile last week.

This Week's Rate Forecast: Neutral

1) Jobs: We have a ton of job and wage related data this week culminating in Big Jobs Friday. The market will be watching the deluge of jobs data closely as last week the Fed said that Inflation had indeed made "substantial progress" towards their goals however labor still lagged. If we get a strong jobs report on Friday, that may start to pressure pricing towards a taper in 2021.

2) ISMs: We get very important ISM Manufacturing and Services this week. Both releases will show exactly what our growth pace is and contain very important internal readings on employment as well.

3) Geopolitical: The bond market will continue to watch the discussions on the budget reconciliation process in an attempt to push through $3.5T in spending along with another $1T (about half of that number was previously allocated from prior Covid relief Bills, only half is new money) that the Senate has already passed. Hand in hand with that is the ability to pay for that with a Debt Ceiling fast approaching that will have to be raised or this all comes to a big halt.

This Week's Potential Volatility: Neutral

This morning we're seeing some positive movement in the markets. Volatility will stay moderate depending on incoming jobs data. Keep a look out for Big jobs Friday.

Bottom Line:

If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.

About Richard Sardella

Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.

About This Report And Disclosure Information

All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.

MLO of record MLO.100007700 / NMLS#233568 / CHM NMLS#127716.

Posted by Richard Sardella MLO.100007700/NMLS 233568 on August 30th, 2021 10:20 AM

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