Well now that the Super Bowl is over, it’s time to look forward toward spring and the rest of 2013.
The holidays have passed and now many individuals are determining what their financial goals are for the year.
Is this the year to finally sell a home, buy a home, or just continue to sit tight?
While all those questions may have different answers, depending upon your current position, it’s clear that it’s a seller’s market right now.
It’s not a traditional seller’s market, largely because most homeowners don’t have much home equity, but the current environment does favor sellers because inventory is just so tight.
There’s also voracious demand at the moment, thanks to the perception that the worst is now behind us, and that if you buy in now, you’ll get a cheap home with an even cheaper mortgage.
Unfortunately, this herd mentality often precedes a bubble, that is, an unwarranted surge in price before a sudden and dramatic correction.
Housing Bubble Part Deux?
So, are we in for more trouble, now that seemingly every pundit, analyst, government official, interested party, and American is in on the supposed recovery?
The few who believe we are in for another bubble basically think the Fed created artificial demand for housing by pushing mortgage rates to new record lows, via quantitative easing like QE3.
It’s hard to argue with that fact – mortgage rates did indeed fall to unprecedented levels, and with that seemed to come a newfound demand for housing.
But even though demand is up, home sales are still lower than they have been historically.
All the recent “killer numbers” are only good, or improved, relative to the preceding dismal years.
And one could argue that home prices are on the mend because they’re cheap, not because rates are low. After all, plenty of recent sales have gone to cash buyers who could care less about rates.
If you look at the historical relationship of home prices and mortgage rates, it’s not what you’d think.
There’s not much of a correlation, and higher mortgage rates could actually come with higher home prices as a result of an improving economy.
It’s not as if the moment rates rise home prices will plummet, though the current situation is a little unprecedented.
Additionally, home prices are only up from the “bottom,” and nowhere close to fully recovered, assuming they eventually match the prices seen during the previous bubble, which history tells us they will.
In other words, inventory shortages and low prices are the real driver of demand at the moment, not necessarily low rates.
The low rates are more a boon to those looking to refinance their now expensive mortgages, not reason alone to purchase a home.
Housing bears also believe unemployment will continue to hinder a real recovery, and that there just aren’t any real buyers, only speculators.
The reasoning here is that there aren’t any first-time homebuyers because the economy is in the dumps, and there aren’t any move-up buyers because existing owners don’t have equity.
I think this is a convenient way of summing things up, but doesn’t represent reality. There are plenty of individuals who “missed” the first bubble, and have been patiently waiting to get in this time around.
There are also millions of existing owners with plenty of equity that want to buy again, especially at much lower prices.
What About Mortgage Quality?
To further argue against another housing bubble, the quality of mortgages this time ‘round is night and day.
Can you really compare a 30-year fixed at 3.5% to an option arm with a 1% teaser rate, which after five years, will reset to a fully-indexed and variable rate of 6% or higher.
Or a more straightforward interest-only ARM that becomes fully amortizing (and fully indexed) after 10 years, pushing a homeowner to the brink of default?
Oh, and those types of loans were also taken out at the height of the market, making mortgage payments that much more unsustainable.
Today, borrowers are taking out mortgages they can truly afford, with more skin in the game and no surprise resets in the future. Surely that will make for a more bubble-resistant housing market going forward.
But don’t be surprised if there are some hiccups along the way, because there will always be ups and downs.
Read more: What caused the housing crisis?