There’s renewed fear that another housing crisis is on the horizon because home values are inching closer and closer to their so-called “bubble-era prices.”
However, this line of thinking is flawed for a number of reasons, the most obvious being that it’s now a decade later.
I was reading an article in the Orange County Register, which is certainly housing (and mortgage) central here on the West Coast and perhaps nationwide.
The headline served as a warning, proclaiming a return to bubble-era prices in the ritzy county that’s home to places like Newport Beach and Corona del Mar.
Get Ready for New Highs in the OC
Apparently the median home price rose to $645,000 in the OC last month, its highest point since peaking in June 2007.
As the article points out, the bottom dropped out a month later, thanks to subprime mortgages and bloated home prices.
Over the course of 19 months, the median slipped to $275,000, leading to scores of mortgage delinquencies, short sales, and foreclosures.
The OC is the first Southern California county to reach its pre-recession peak, per data from CoreLogic, with nearby counties such as Los Angeles and San Diego still off 5.5% from their highs.
In more outskirty places like Riverside and San Bernardino, prices are still way off their highs, 23.6% and 28.9% lower, respectively.
Meanwhile, many Bay Area counties up in the north of California are enjoying new all-time highs and have been for some time.
The same is true of other desirable parts of the country, such as red hot Denver, where home prices keep ascending to new heights.
Should We Prepare for Another Crisis?
Now the article says home “buyers are balking at paying these record-level prices,” but only basing that on the fact that Orange County home sales fell 6.5% in April from a year earlier.
It was just one of two year-over-year sales declines in the past 14 months, which CoreLogic analyst Andrew LePage attributes “to a lack of affordability, inventory and mortgage credit.”
Oh, so it’s not necessarily high home prices, but perhaps inventory that’s the problem. Prospective home buyers are still hungry but there just isn’t enough to go around.
The mortgage credit comment is also a headscratcher, given the fact that you can buy a home with just 3% down nowadays. And the average credit score on newly approved loans has been dropping.
That supposed tougher underwriting environment would also mean that the housing market is healthier, with fewer bad mortgages being extended to home buyers at these supposed peak prices.
As mentioned earlier, those bubble-era prices were also achieved about a decade ago. Why does it really matter if we reach them again? Are today’s dollars worth the same amount they were 10 years ago?
Last time I checked, just about everything is more expensive than it was in 2006-2007…I don’t remember a pint of beer setting me back $7-9 back then. It was probably closer to $4-6.
Inflation means today’s home prices may not actually be as high as they were during the previous boom.
Sure, nominal prices (those not adjusted for inflation) might be at or above the prices back then, but real home prices (adjusted for inflation) are still much lower than they once were.
The Current Batch of Mortgages Is Pristine
Oh, and let’s not forget that mortgage rates are a lot lower than they were back then too, and would need to rise significantly to stall home price growth.
That would explain why the Mortgage Debt Service Ratio, which is the the percentage of disposable income that goes toward the mortgage, is at its lowest point since 1980.
That statistic comes from the latest S&P/Experian Consumer Credit Default Indices.
So to get this straight, borrowers are spending the least amount of money on their mortgages in nearly 40 years and home prices aren’t really as high as they appear.
And pretty much every homeowner these days has a 30-year or 15-year fixed mortgage with a super low interest rate that was fully documented during origination (they can actually afford it!).
That sure doesn’t sound like a crisis, even if homes aren’t so cheap anymore. Just practice discretion when home shopping, there are a lot of turds out there that don’t deserve to be priced as they are.