Are we in a housing bubble and is the bubble about to burst? While some are panicking, others are denying the collapse is coming, but where is the market really going? In this episode, David Sidoni takes a look at the data and tries to flesh out what is happening. We look at what causes a bubble and David also analyzes the factors that can influence the market. Listen in for a thought-provoking discussion on the market and the possibility of a bubble.
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Is This A Housing Bubble Ready To Burst?
First Time Home Buyer’s Guide To Timing The 2021 Housing Market
Are We In A Bubble?
If you are buying a home because you fear a big housing bubble, it’s either you are pretty smart or you are a little ignorant. According to the data, you are both wrong.
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Let’s get right into this hot topic. Google searches for the question, “Is this a housing bubble?” It’s up 2,450%. That’s a lot of percent. The internet is going nuts with this. Some of you out there, you are asking me questions yourselves. The question I hear most of the time from you because you have already passed this whole bubble stuff is, “How much over listing price should I offer?” That’s going to be my next episode.
In this episode, we are talking to everybody that wants to know everything about the housing bubble. Prices are going up like crazy. We are talking 19%. I put that up on my Instagram and that blew up because nobody realized that. In some places, we are up 25%. If you compare that to the historical average where the housing prices increase at about 4% a year and that’s including all the ups and downs, then that means we are going through nuts of appreciation. It’s skyrocketing. From April to May in 2021, just 30 days, we saw appreciation increase from 2.1% to 3.7%, depending on where you were in the country. This doesn’t sound a lot but think about it, the average is 4% for a year. In some places, we are going up to 2.1% or 3.7%. That’s in one month.
The next burning question that I’m sure you have is, “Why did I label your bubble opinions at the top of the show as either smart or ignorant and then inexplicably say that the data says that both of those opinions are wrong?” It sounds like a riddle I would tell my kids to piss them off. Let me explain. First of all, smart. That’s easy. Those numbers I gave you, the 19% to 25% appreciation, that’s insane. Any logical person would think, “This is a bubble. It’s got to burst.” We are going to get to the facts and data, on that, I will show you maybe some other ways to think about it.
Next, I want to make sure that those of you who think I called you ignorant aren’t going to come and find me, and do terrible things to me. Let me clear up the word ignorant. Calm down, tiger. Don’t go screaming, “Do you think you are better than me?” I’m not that way about ignorant. I agree that most of the time, in context, ignorant has a negative connotation. I get it but that’s not how I see it.
The smartest people I have been lucky enough to come across in my long old life know that they don’t know what they don’t know. They don’t feel bad or insecure about it. I have found that the intelligent people that I meet who sink themselves and have a conversation with me are confident in what they do know and consistently seeking to learn in what they don’t know. Confidence embraces ignorance and seeks to change it if that thing that they are learning about is important to the person.
Ignorance is not bad or stupid. It’s uninformed on a topic. You are uninformed. Don’t worry about it. To me, being ignorant is something that I see as an exciting opportunity to learn something from something I don’t know. Chill out, relax, believe in yourself, be confident, be cool. Realize you can’t learn everything about a housing bubble in a five-minute Google search. I’m ignorant. I will tell you my truth. I can’t fix a car. I can’t remove my dog’s spleen. I don’t even know if they have spleens. I’m ignorant, no big whoop.
How Do Bubbles Happen?
Let’s jump right into this data. I accumulated this data from the best economic minds out there, both bullish and bearish, which means optimistic and pessimistic. Some of this is data. It’s facts. Most of it is. No opinions. I’m going to spit all this out there, drop the knowledge, you read and then you decide for yourself. First, some facts on how housing bubbles happen. The big burst happens with three things. One, prices are appreciating too quickly. Two, there are lower down payments so the equity position is low right from the start. Three, the mortgage rates are adjustable and not fixed.
Where are we? What’s the data for these major factors in the 2021 market? This is going to tell us if we are going to have this bubble. Number one is runaway pricing, check. We’ve got that. Number two, low down payments. You can still buy a home with a low down payment but the average down payment being used in this crazy price run-up is double the down payments that we were seeing the last time before that big crash back in 2008.
Number three, adjustable-rate mortgages. These were popular back in the shady days of real estate. They started low like 2%. In a few years, they ballooned up to 5%, 6%, 7%. Your monthly payment doubles or triples. The good news is those are gone. People wised up and the banks got slapped hard for doing all that shady stuff without disclosing the real effects to the borrower or the buyer. Now, it’s much more stringent to qualify for a loan. It’s even harder to get one.
Before the crash, I swear to God, you could do a stated income loan and that’s as stupid as it sounds. You could state, “Mr. Banker, I make $150,000 a year.” If your credit was all right, sometimes even if it wasn’t, then your statement was enough to get you a loan. It’s ridiculous. No supporting documents. It’s your statement. The banks give you the money, you go into foreclosure, they would sell your house and the bank would try to get back as much money as they could. That isn’t happening now.
[bctt tweet=”The smartest people know that they don’t know what they don’t know, and they don’t feel bad or insecure about it.” via=”no”]
Fixed loans with no interest rate increase over 30 years. You’ve got to legitimately qualify for a loan. Ask anybody who’s tried to buy a home in the last few years and they will tell you the hardest part is gathering all the documents for the bank. They want tax returns, bank statements, pay stubs, job verifications. Sometimes you feel like you are going to be waiting for them to ask you for blood and hair samples, a colonic or at least it feels like colonic. That’s what I have been told. This is a good thing for housing stability.
The Rundown
Now that we know the three things that define a bubble, what a bubble is and why they happen, let me give you a rundown on what we are going to cover in excruciating detail in this episode. I haven’t had an episode out for a while and you saw the time on this one and you thought, “What are you doing, Sidoni?” This could be a two-parter for you to read. I’m going to give you everything you need to know about the bubble now. You can stretch out your workout if you are on the treadmill. Make it a real workout. Burn some calories and learn something by reading this whole thing. Learn something useful for yourself. Instead, you could stop halfway, wimp out, go home after doing twelve minutes on Level 2 on the show because you’ve got to get home and binge that shows. I’m just saying.
If you want this info short and sweet, I love you, wrong show. I am here to educate you to make sure you can make the right call, whatever that is. I’m not here to scare you into buying or selling a home with me. That’s what those headlines you find on the internet are there for. They are trying to scare you into picking up the phone, putting in your email and talking to that person. I’m going facts. These are the facts we are going to cover. It’s not my opinion. I spent days putting together all the facts and the data that I have accumulated for the past few years.
While the public has only been googling and wondering about the potential bubble, I have been keeping an eye on this from the minute that the run of price increases started. I was watching that for years since that’s a normal real estate up and down cycle. That started in 2012. In 2017, we were at five years. I have been reading and watching this bubble stuff since 2017. That’s five years from the bottom of the crash. Did you know that we had a crazy run like this in 2013? There were bidding wars, buying over list price, multiple offers. I have been paying attention to this and watching the data since then and since some of you out there were applying to go to college before you started racking up all your student loans.
Banks And Foreclosures
This is full-on “plagiarize” regurgitated data that I’m giving to you gathered over the years and it’s not my opinion. It’s the data. I’m going to present and you decide. The topics in this episode are, This looks a lot like 2008. I remember hearing about foreclosures and some crazy crash stuff in junior high, high school and college back in 2008. That sucked. Topic number two is Supply and Demand. Topic number three, Lending. You need to borrow money to buy a house. How’s that working out? Topic number four, Mortgage Interest Rates. That matters a ton. Topic number five, remember those foreclosures we are talking about? What about forbearance? Isn’t that going to make a whole bunch more of those?
2008 Versus 2021
Topic number six, is all of this artificial because of the pandemic bailout money? What happens when reality hits? Topic number seven, Predictions, Forecasts, Optimistic and Pessimistic. We are going to hear it all. Topic number one, is this different from 2008? For those of you who weren’t paying attention in 2008, the economic world collapsed and it was mostly due to two things. The banks were greedy pigs and put all their eggs into the mortgage industry and screwed the 99%. It was ugly. Number two, the stock market, as it always does, went through a cycle and crashed. Both those things happen at once.
Most experts, however, believe that if there’s another recession, it will not resemble 2008. The housing market is in no way the same way as it was before. Ali Wolf, the Director of Economic Research at the real estate consulting firm Meyers Research, addressed this. She said, “With people having PTSD from the last time, they are still afraid of buying at the wrong time.”
Another economist Jeff Tucker explained, “As we look ahead to the next recession, it’s important to recognize how unusual the conditions were that caused the last one and what’s different about the housing market now. Rather than abundant homes, we have a shortage of new home supplies. Rather than risky borrowers taking on adjustable-rate mortgages, we have buyers with Sterling credit scores taking out predictable 30-year fixed-rate mortgages. The housing market is simply much less risky than it was years ago.”
Here’s the way it goes. In the past many years there have been two national recessions, we had the dot-com crash of 2001 and then the great recession in 2008. It’s true, during that last one, the one that’s fresh in everyone’s mind, we lost 19% or 20%. On average, some places lost 30% or 40% in the pricing of their houses and it caused a mortgage meltdown that heavily impacted the housing market. However, while stock prices fell almost 25% in 2001, home values appreciated 6.6%. They say that the triggers of the next recession are more closely going to mirror the 2001 recession, not those from 2008.
For those of you who haven’t read the show for a while, first of all, thanks so much. Good to see you again. Way back in November 2019, that was episode 29 of this show, I knew that we were in for a stock market recession. It was on an eleven-year run-up and it had to end sometime. I tried to prepare you for that recession. Fast forward to 2021 and it still hasn’t happened yet. Still, the big economists are telling us that they believe that this crash will mirror the other recessions where housing is not crushed in the chaos.
I’m going to give you three main arguments about the differences between 2008, 2021, 2022 or 2023, whenever you think a bubble might happen and I will give you both sides. Bubble thinking, fact number one, we are going to be talking about affordability. Prices are stupid and no regular Joe, Jolene, him, her, they, them can afford a mortgage on what they make. Home values have outpaced wage gains. Just like in 2008, affordability is going to kill the market. That’s one side.
The other side is the non-bubble burst thinking, a regular slowdown, some-day thinking. I agree, the gap between wages and home price growth sucks and it should and will cause a big problem. The data with this run-up in the housing market shows that this gap hit those super sucky levels before we had the last crash. We hit those in 2012. What’s up? It has been over seven years. Where’s the burst? It hasn’t happened because the equation to determine affordability has three main elements, home prices, wages and mortgage interest rates.
The mortgage interest rate is about 3.25% versus 6.41% in 2006. That’s screwing up the whole equation. Buyers’ purchasing power is much greater than it was years ago. Continuing on that bubble thinking, number two, in 2018 as in 2005, housing price growth began slowing a little bit with significant price drops occurring in some major markets. New York City dropped a ton and they are the center of the universe. We’ve got a bubble coming.
New York had its thing but as of 2021, the data only shows one major market in a true depreciation, Seattle. Go cracking. Sorry, Seattle people. Even those values in that city are starting to reverse. Now I don’t feel so bad for you, Seattle. CoreLogic, which is a strictly data-producing company, is projecting the home price appreciation to re-accelerate across the country.
By the way, that whole Manhattan argument, home prices dropped in that city because they had a new mansion tax and it zapped up all the demand. Additionally, the new Federal tax code went into effect in 2020 and that continues to impact all the markets because it caps deductions for state and local taxes. It’s known as SALT. It caps it at $10,000. That affects the more expensive places that you are trying to buy a house. The last time I checked, New York was expensive.
Bubble argument number three, from the bubble thinkers, prices are going to crash because that’s what happened during the last recession. Non-bubble thinkers, except that in 3 out of the last 5 recessions going way back, housing went up by levels of 3.5%, 6.1% and 6.6%. It only went down twice. One of that time, it only went down less than 2%. The other time was 2008 when it was caused by the housing market. That was caused by those predatory loans, crappy big banks screwing us on mortgages and horrible lending policies. We are going to get more into the lending policies when we hit topic number three.
The price is determined by supply and demand. We will kick that a little bit more in topic number two. The bottom line is this is not like 2008. We need to realize that in the real estate market nowadays, it’s not going to be the same thing when a recession occurs and it will. I’m not Pollyanna. A recession is going to happen. It won’t resemble the last recession with housing leading the charge. No one is going to be able to predict the next recession when it’s going to happen. Expecting one could take place in the next 18 to 24 months is pretty understandable based on the stock market running as long as it has. It is, however, important to realize that the impact of a recession on the housing market will not be the same.
We are going to do a quick side note before I get to the next topic. One more thing on the differences between 2008 and now. This is my opinion. This is something I have been thinking about for a long time. Lots of these bubble headlines that you see compared to 2008, do you know they are written by? The real estate industry, do you know what the real estate industry wants to do? It wants to get more sellers. They don’t give a crap about buyers.
If you have followed my show, you will know that. You will know the secrets, the insider tips that I will be giving you to let you know that the industry doesn’t give a crap about buyers. You are a tool. You are a cog in the wheel. They want listings, which means they want to get houses to sell. They realize or at least they think that you are desperate and predictable buyers are going to show up like you always do. Why waste any time trying to market to you? They are too busy out there advertising and selling what can be perceived as false information telling people to cash out now because it’s going to blow. “This bubble is going to burst. This is your chance and you better do it before you lose all your money.”
They are going to show you that there are way too many buyers for way too few homes and that’s going to keep, elevate the market and keep it from crashing. I’m not saying it’s going up forever. Do not think you can buy a house and flip. Read episode 40. I did that in February 2021. That was for all the first-time buyers, it was, Should I Buy My First Home Now or Wait? If you have read then and you decided that maybe you should buy and then you bought a home in March 2021, you would be up almost 10% on your house now. It’s my opinion. The last part is not an opinion. If you bought it, you would be up 10%. That’s a fact.
[bctt tweet=”Ignorance isn’t bad or stupid. It’s just being uninformed on a topic.” via=”no”]
Supply And Demand
Topic number two, supply and demand. The pricing of any item is determined by how many items are available compared to how many people want to buy them. I went back to high school economics. That’s supply and demand. As a result, the strong year-over-year home appreciation is pretty simple to explain. The demand for housing is up while the supply of homes for sales is low. In 2021, we have 1.03 million homes for sale compared to a peak of 4 million homes at the height of the last housing bubble in 2007.
My buddy, Lawrence Yun, the Economist for the National Association of Realtors, I call him Larry. I know if I ever meet him, he would tell me he hates that but I don’t care. Larry Yun says, “This is not a bubble. It’s simply a lack of supply.” Nowadays housing market is healthy and rising prices are driven by real buyer demand. For more than six years, we have suffered from this woeful lack of homes to buy in the US. Simultaneously, we are adding almost 10 million new households. Not every household translates into a new homeowner. We get that. Given the demographic growth and the ongoing shortage of inventory, it’s simple math. We are going to run into a limit on supply.
One of the main reasons is that the pandemic stopped everybody in their tracks. Even before that, people were not moving as often as they used to. Depending on which report you read, people used to move every 4 or 5 years. Now, that number is 8 to 10 years. That means there’s less turnover of homes and less supply. The supply stays scarce and the prices rise. Don’t forget, the population doesn’t stop. We keep making people. That’s the way people work. They make more people and it’s not slowing down.
There’s the big one when it comes to supply and demand. Get your minds out of the gutter. I’m talking about our big fact. If you think about it, this big one makes a lot of sense. There are not enough homes being built. Builders, like everyone else, got crazy greedy in the early 2000s. They started building all kinds of new homes. Building a home isn’t done in a year. In 2003, they couldn’t build a whole bunch of homes for 2004.
It takes about 5 to 7 years because they’ve got to get permits, vacant land, buy the land, grade the land, get the architects, get the supplies, hire the crew, and then put up all those fancy little signs, billboards and the banners that get you to pull over and look at the model homes. By the way, if you do go in there and look at the model homes, the ones they show you are not the price on the billboard. They are $150,000 or $200,000 more because you have to buy all the upgrades. That’s a little side lesson.
When the market started to explode in 2003, the builder started planning to max out and sell for top dollar. They’ve got greedy. They went and they’ve got all their homes. It takes 5 to 7 years so 2008 happened from there. In 2003, 4 and 5 plans, no buyers. They all went bankrupt. There were way fewer homes being built. They overbuilt during the bubble. What they have had to do is they have either had to pull back or quit building altogether because they went bankrupt.
Sam Khater, the Chief Economist Economic and Housing Research at Freddie Mac, explained this, “The main driver of the housing shortfall has been the long-term decline in the construction of single-family homes.” I don’t know why I quoted him. He said everything I have been saying. When you ask why there are many bidding wars and multiple offers, it’s because of these numbers. In the ‘70s, we built 11 million homes. In the ‘80s, 9.8 million homes. In the ‘90s, we built 10.7 million homes. From the 2000s to 2009, we built 12.6 million homes. 2010 to 2019, 6.5 million homes.
We haven’t stopped making people. From 2010 to 2019, the economy increased. We had a little pandemic but now everyone is coming back. We only have half the amount of homes. People are making people. In the past years, we only built about half the homes to have a house. There aren’t enough houses. That’s all there is to it. This is not the 2008 bubble because there were four times as many homes for sale back then.
If you didn’t like the price of a home, you went down the street because there were four of the houses on the block or in the condo complex. You would keep writing offers until you found the one most desperate and would take your low price. Now, due to the supply and demand data and a few other key reasons, you go out on the first weekend and you have to battle it out with 40 other buyers for that one home on the block. It’s probably not even your first choice of a block because that one had no homes for sale.
Barring a global economic meltdown, this shouldn’t burst. It will annoyingly slow leak. It’s like when you release the air from a balloon and you hold the neck and it makes that horrible sound. Do you know that horrible sound? The flatulation sound at the end when you release the balloon? That will be the day that the average number of offers on a home is 1 or 2 offers after 60 days on the market. That last horrible little sound is not when you are getting a mad rush as you have now.
In the meantime, if you subscribe and keep reading, I’m going to give you the update on the slow air coming out on that balloon. I have helped twelve local Southern California readers buy their first homes. That’s part of the reason I have been gone for you, loyal readers out there. Daddy is back. Don’t worry. Our average number of offers that we’ve got was 5 to 7 houses. It’s usually competing against 20 to 40 offers. That’s a lot of offers and a lot of people. That’s not slowing down anytime soon. When it does, I will let you know. I seriously doubt we are going to go from 5 to 7 houses to write an offer competing against 40 people down to no offers immediately. It’s going to take some time.
Back to the builders. Have you heard about this crazy 300% increase in lumber? A ton of builders went bankrupt. We are not building enough homes and the public is screaming for more homes to be built because the prices are too high in the resale homes. Now, the costs are escalating in the prices of building new homes. We’ve got to catch-22. We will build you new homes since prices are too high on resale but the average additional cost to us is $35,872. That means we are going to need to raise the average price by about $50,000 to make a profit.
Now, you can’t buy the resale home because they are going up and they are too expensive because there are not enough homes being built. You ask them to build one that’s $50,000 more. That’s what we call a catch-22. By the way, I did my research on this one. Do you know why it’s called a catch-22?
It’s from Joseph Heller’s satirical novel, Catch-22. It’s when an Army bombardier tried to get out of combat by requesting a leave of insanity. He asked the psychiatrists, “Do you mean there’s a catch?” The shrink says, “Sure, there’s a catch. A catch-22.” Anyone who wants to get out on combat duty isn’t crazy. That’s the explanation. There’s no freaking explanation for the 22. It’s a catch. It’s got to be the most disappointing origin story ever.
Speaking of disappointments, do you want to know another fun fact about why the supply is worse than my son’s chances of getting a date for the prom? Big corporations and investment firms can’t screw us on loans anymore but you know what they can do? They are scooping up tons of homes and buying them because their bean counters know that there’s not going to be a huge bubble. We are going to go up slowly and then it’s going to eventually come down. They realize that they can make some money in the meantime, they know mortgage rates are low and they can give them even lower rates when they go out and buy them in bulk. They know that rent prices have no real regulation on them so they buy them to rent them out and they can raise rents every year and make a huge profit.
“Great news. Way to go. Sidoni, I follow this show to be optimistic. You are killing me.” Here’s some relief around the corner. There is some change. 39 of the 50 states, including the District of Columbia saw increases in inventory. That’s a good thing. The inventory increase is a combination of a lot of things. First and foremost, greed. That neighbor, “Sally got how much for her pile of garbage that she calls a house? I could get twice as much for our place.” It happens.
There’s the pandemic effect. A lot of people hunker down, don’t want to think about going outside and look at homes, certainly not to let strangers into their homes if they were going to sell theirs, especially the elderly. As we are in the middle of 2021, things are starting to loosen up. The pandemic is going through its phases but things are better than they were in 2020. Vaccines are happening, especially among the elderly who had to be extra cautious for a little while.
There’s a pent-up desire to make the move that they have been holding off. Maybe they were ready to retire, “As soon as summer comes around, I’m out of here. I’m going to buy my dream house.” It’s the circle of life. Sometimes people are getting ready to go but maybe they have to go during the middle of 2020. They had to put those plans on hold and now they are ready to finish them up. They are ready to do those plans. Elderly people are downsizing. Young families with small children, I’m sure after one and a half years inside with a screaming baby, you are ready for a bigger place.
There’s some more good news here. The builders are starting to take out more permits, which means that more projects are getting started, more homes are being built. I know some of you out there have heard about this mortgage forbearance. We are going to explain that. If you have only heard the scary clickbait version of it, then all you have heard about is that means a bunch of foreclosures. If you believe that, that’s great and I understand that. Even foreclosures mean that more homes are on the market. It’s not a bad thing if that ends up happening. We will get into that and we will discuss that as we get to our next point.
Wrapping up supply and demand, back to my boy, Lawrence Yun, the Chief Economist from the National Association of Realtors. He said, “The worst-case outcome would be if rates remain low. Demand would pick up with new jobs and there’s no increase in supply. The only thing that moves is home prices going up until people got priced out.” That would mean we are creating a divided society of haves and have nots. Larry, that’s harsh. How about the best-case outcome? On the other hand, Larry says that, “There would be a construction boom accelerated by maybe the government infrastructure plans, which create more supply to help stop the rise in prices.” Larry, some interesting ideas. That’s for you to figure out.
Debt And The Real Estate Market
Let’s go-to topic number three, the lending differences. Much like the market, demand for housing in the 2000s was insane. It’s super strong but there was a major difference between the two markets and that much of the demand back then wasn’t real. It certainly wasn’t sustainable. What do I mean not real? My loans were a joke. Any yahoo could get one. I said yahoo to remind you that I’m experienced. Ranchers who could barely qualify for a car are becoming homeowners.
[bctt tweet=”Confidence embraces ignorance and seeks to change it.” via=”no”]
At the peak in 2007, 40% of the record seven million home sales were second homes for more of those yahoo’s that suddenly decided to become real estate investors. The only thing that they had ever invested in or done anything in our life was buying baseball or basketball cards on eBay. It was 2007 and people still used eBay. This is real estate people. I’m not kidding. They used to say, “If they are breathing and could put two sentences together, bring them in and I can get them a loan. If they can’t put two sentences together, never mind. Have them write something down. We will make it work.” Cool business.
This whole loan thing is the principal reason why we saw a housing bubble form, get big and blow up right in our faces. From the reports on this, you know that they were legit. This is data written by old nerds. How do you know that? They were talking about, “In 2007, everyone was afraid of FOMO. It was driving everybody to buy.” I swear to God, they put Fear Of Missing Out in parentheses in case the reader didn’t know what FOMO meant. Those old nerds know what they are talking about.
They should fear the Great Recession because, in 2008, it started and the financial systems that the world depend on started to collapse. Everyone panicked and large companies like Lehman Brothers went out of business and a whole bunch more. In 2007, only three banks failed. In 2008, as the crash was starting, 25 banks failed. From 2009 to 2014, the numbers of banks that have failed annually were 140 and 157 at the peak, 92, 51, 24, and then slowing down to 18. From 2015 to 2021, the average is less than 5, 4.8. banks fail a year.
Why the slowdown and failures after the crash? First of all, we started to come back as an economy but the government came in to regulate the banks through the CFPB. If you don’t know what that is, look it up. You’ve got a computer in your pocket. There are pros and cons to the CFPB depending on what color you vote for. I’m not going to get into that and I don’t care because here’s the one thing they did for sure, they stopped the stupid lending policies that crashed our last market. They changed the rules. They told the banks they needed more reserves and they could no longer underwrite these toxic, predatory, lame mortgages.
Remember those stated loans that I was talking about at the top with no documentation to verify your incomes or assets? Those are gone. That changes things a lot. Also, they were much more lenient on credit scores back then. Don’t freak out if you’ve got a bad credit score. You can still purchase with less than perfect credit. People are working harder to move their scores up to get the best deal. In 2020, 70% of mortgage originations or mortgages that happened were going to borrowers with FICO scores of 760. The average credit score for the past years was a high 754.
Don’t freak out if your score is low. Don’t stop reading. You are going to get there. There are ways you can buy with low credit also. What they used to call subprime borrowing is not as freaky out of control as it used to be. Only about 2% of the buyers have less than a 720 or less than a 620 credit score. Back in the day, in 2007, that was at 13%. If you are below 620, it’s not impossible but the best thing you can do is go back and read our other episodes on credit, episode 3 and episode 8. That will help pump up your credit score. Remember, episode 3 and 8 of the How To A Buy Home show, those were early episodes before I had a decent microphone. Believe it or not, the jokes were even worse, I swear to God. It was early in my podcasting career. Give me a little grace, mercy and forgiveness.
I have another balloon metaphor. The real estate industries and lending industries are not super creative. They only come up with one thing and those are balloon adjustable rate payments. Why did those balloon adjustable rate payments make a balloon that’s going to pop? It’s because they start super low and then they jump up. In 2004, 35% of the mortgages were Adjustable-Rate Mortgages or ARMs. Some of them are called teaser loans. That sounds legit. It’s something you hear when you are at the OTB trying to bet on horses or at Vegas, “Give me a teaser on the fifth.” It teases you right into foreclosure. Now, they are only 2.4% of the market. In general, here’s the home loan situation. They are a hell of a lot harder to get now and that’s a good thing.
I had an investor that bought a whole bunch of homes before the last bubble when the lending rules were stupid. After the crash happened, he lost a little money on some of them. He’s like, “I need to buy another one.” 2 or 3 years after and all these new regulations have happened and he wants to go in. I get a call from him when he left the bank, “David, they are asking for so much documentation. I’m going to walk in the bank naked with my bank account statement and tell them to give me the damn loan.” “Sorry, it’s the new rules.” Remember, back in the day, it’s a case of, “We give you an engine and you take 37 miles?” Where we are now, things get back to normal and that is a good thing for stability.
To super nerd out on this, let’s take a look at one stat that you have never heard of. The Mortgage Bankers Association, also known as the MBA, has an index that is calculated using several different factors and relates to the borrower’s eligibility. It’s like, “Should we give this dude or dudette a loan?” The lower the score, the better it is. They take into account your credit score, the loan type, the loan-to-value ratio and a whole bunch of other googly-gobbly words about mortgages. The lower the score, the less of the risk and that’s what the banks are looking for.
It was down to 100 in 2008. Now, it’s slowly going up. Here’s the thing. Were 200, 300, 400-ish, somewhere around there. I couldn’t find the 2021 stat. It was rising from 100 to 200 from 2008 to 2019. It’s rising to the position. Even so, we are half that 900 number if not better than the last crash, which means we are twice as good as borrowers, which means we have less of a chance for things to get ugly.
This is one that I have told everybody back in the day and I’m telling you now. Wherever you are and if you have been reading all this real estate gobbledygook, first of all, good for you. What are you doing? For the rest of you who tuned me out, wake up. How much do you hate me? This is a stat that I screamed at everybody in 2011 and no one would listen to me. Why? It’s because I was the real estate guy. Who wants to listen to a real estate guy in 2011? Everybody hated real estate. It made them pee their pants a little bit when I walked into the room.
Home equity lines got big after 1986. It’s a HELOC. It’s borrowing against the equity of your house. It’s called a second mortgage or a second. In the Tax Reform of 1986, they eliminated a big tax deduction for people, interest on consumer purchases. You could buy something, use a credit card and put it on loan. You can write off the interest. They took that away. They only left one in place, the interest in the service on residence-based debt. That means if you borrowed against your house, used a home equity line of credit, a HELOC, the interest of that loan using your house as an ATM is tax-deductible. You could drive up your credit cards, pay them off for their HELOC and write off the interest that you pay back when you are paying back that loan.
From 1986 to 2000, Americans borrowed against their home equity for cash to pay their other debts, their college expenses, their emergencies or to do home improvements. It took a while for lots of people to get on board. By the time we’ve got to the year 2000, Americans had borrowed $60 billion that year. That’s a lot of borrowing. Here’s the one stat that no one listened to that I heard and regurgitated to anyone that would listen. I found this stat out and I told everyone. Think about it, from ‘86 to 2000, it took fourteen years to get up to an annual loan pull out, that’s a technical real estate term, of $60 billion.
Six years later, in 2006, when the market went nuts and people got greedy and their home values were doubling, that number went to $626 billion. From $60 billion to $626 billion in home equity lines of credit in six years. That meant tons of homeowners were borrowing on equity to the top of the equity of their homes. If the market dropped even a little bit, they were going to be upside down on their mortgage. It didn’t just drop a little bit. It dropped hugely. A huge part of the country was underwater but at least they pulled money out and they bought CDOs with their HELOCs. None of those people listen to that fact. They’ve got freaked out when they saw a real estate person in 2011. Everyone was scared.
[bctt tweet=”You can’t learn everything about a housing bubble in a five-minute Google search.” via=”no”]
Now, the percentage of cash-out refis, that’s where the homeowner takes at least 5% more than their original mortgage amount, that’s half of what it was in 2006. Those numbers, as far as what people are taking out of their house, are way down. A lot of that has to do with the fact that in 2017, the Tax Cut and Jobs Act of 2017 suspended the deduction for interest paid on home equity and lines of credit, the thing that got everyone all excited about this in the first place.
According to the IRS, “They are used to buying, building or substantially improving the taxpayers home that secures the loan.” In other words, no more paying for college, CDOs, Vegas trips. You can only improve your house. Most of the HELOCs nowadays are only used for improving the house. The number of people that are taking money out is much lower than it used to be and that means we don’t have a probability of so many people going underwater should the market take a dip.
The bottom line on this one is lending. It’s easier to get a mortgage now than it was immediately after the market crashed but it’s still difficult. The credit quality and down payments are far higher nowadays than they used to be and the mortgage credit supply remains relatively tight to where it was before the collapse of the housing market. Let me sum that up for you. The difference between now and 2006, at that time, any yahoo could get a loan and they did.
Mortgage And Interest Rates
We are going to topic number four. Remember, if you google, “Are we having a bubble,” you read three sentences and you make a decision, I don’t think you have enough data. January 15th, 2012 was the lowest 30-year fixed mortgage rate in history. Let’s talk about mortgage rates. If you have only been paying attention to mortgage rates, if they go up to 3%, 3.5% or 4%, they are still insanely low. You happen to finally pay attention to mortgage rates around January 15th, 2021 when we were the lowest rate in the history of mortgage rates at 2.66%. This is the lowest ever.
Since then, we have gone up a little bit. We are threes now but the Federal Reserve said that they aren’t doing anything to rock the boat, not until 2022 or maybe even 2023. The low Federal Reserve rate will help and make low mortgage rates, which means low payments, affordable housing, multiple offers, we keep going and going. Here’s what some of the experts are saying. Freddie Mac is saying that they forecast that mortgage rates are going to continue to rise until 2022. “David, you said rates are going to stay low?” Yes. They said they are going to rise to an average of 3.4% in the fourth quarter of 2021 and 3.8% in the fourth quarter of 2022.
If you take into account the average mortgage interest rate predicted by the four most trusted sources in real estate, Freddie Mac, Fannie Mae, the MBA and the National Association of Realtors, they show an average rate increase of 3.35% to 3.68% by next summer 2022. You are going to see a headline that says, “Rates are going up.” They are talking about us seeing still in the mid threes to next summer. That’s stupid low. That’s close to half the 6.41% interest rate the last time we had a crash. In other words, there’s still some room for prices to go up a bit and then slow normally because the payments are going to stay low and they are not going to break the bank.
Topic number five is for some of you smarty-pants out there who think you’ve got some data and some extra info on this. What about the foreclosures coming from the forbearance running out? Let me explain this if you don’t know what I’m talking about. If you haven’t heard, there were 2.3 million homes during the pandemic that got a break on their mortgages and it’s called forbearance. That means they get to skip some of the payments until they get back on their feet. It sounds great and a cool thing.
There’s always a negative Nelly that doesn’t want anyone to get a free ride and thinks that anytime you do something like that, it’s going to cause a problem, kicking the can down the road. I understand. That does make sense. They want to whine about how terrible this is because if you do that to someone, what happens if they come back and they don’t have a job? Their house is going to get foreclosed on because not everyone is going to be able to pay it back. They are right. Not everybody will. Not everyone is going to come back with a job but it doesn’t mean that the house is going to get foreclosed on. There’s a magic cure, equity. Equity is the profit you have in your home. Homes have been harder to get since 2008.
Most people who bought their homes got to write some pretty sweet appreciation since February 2012 when the market bottomed out, started to rise and they had to buy with a little bigger down payment so they’ve got some nice equity. Even if they bought with a low down payment, then their equity has been rising for quite some time. We already found out that you can’t cash out on it and get the tax deductions. It’s not as easy to get a home equity line of credit by using your house as an ATM. That equity is stuck in place in the house. That’s why I was adamant about that last fact. I couldn’t believe how people were pulling money out of their houses. Now they haven’t so they can’t get upside down.
Here are some other facts that will help to avoid foreclosure for these people. First of all, there are 2.3 million people who did some form of forbearance, 48.9% of those homeowners are already caught back up and so 2.3 million, half of them have already paid up. Of those, 6% made their payments during the forbearance period. Seven percent not only caught up but they paid past delinquent payments and 6% paid off their loans in full. Everyone is throwing them into the calculation of people who’ve got forbearance but they don’t even have a loan anymore.
Also, the banks got killed from 2018 and 2012 trying to be real estate brokers and trying to sell houses. It sucked for them. Now they are looking for alternatives. The banks do not want foreclosures. They don’t want the houses back. This time, they are working with the homeowners to help them stay in their homes. Fifty percent of all mortgages are backed by the Federal Housing Finance Agency, FHFA. In 2008, the FHFA, when we had a major foreclosure crisis, tried to help out 208,000 homeowners with some home retention, something to work it out, repayment plans, loan modifications and things like that.
In 2020, that same entity, FHFA, has offered the same protection, the same programs to over one million homeowners. There’s way less of them now. That’s because they don’t want to do this. When people tell you forbearance equals foreclosure, keep that in mind. Almost 50% of the 2.3 million have 50% equity. For those who are tighter now, almost all the lending institutions are working with them. The report from the MBA reveals that for homeowners who have left their forbearance, 5% of them have worked out a repayment plan with their lender. Five percent are guaranteed a loan deferral where a borrower doesn’t have to pay the lender for an agreed time and 9% of them were given a loan modification.
If their fear isn’t enough, how about the government getting involved? The banks are freaked out about this but now the government is getting on top of them. Nobody wants a flood of homes for sale. Bloomberg reported mortgage companies could face penalties if they don’t take a step to prevent foreclosures that threatens to hit the housing market later this 2021. That’s what a US regulator said. The CFPB, the Consumer Financial Protection Bureau said that this is a warning tied to forbearance relief and that they want mortgage servicers to start reaching out to affected homeowners now before it ends to advise them on ways they can modify their loans.
[bctt tweet=”Home values have outpaced wage gains. And just like in 2008, affordability is going to kill the real estate market.” via=”no”]
This isn’t set in stone from the CFPB. We don’t know what’s going to happen but they are talking about it. What that means is that the people who have their heads buried in the sand maybe are going to sneak a peek out of the sand and start listening to think, “I might have some options,” even if they don’t happen. If they do and many of them will because of the price increases, if all else fails, they are going to figure out that they could sell their home because they’ve got equity. Just like the banks, homeowners learned the lesson from the housing crash too.
Some economists said and I want to give credit to the economist nerd, whoever you are, “In the same way that grandparents and great grandparents were shaped by the Great Depression, much of the public now remembers the 2006 mortgage meltdown and the foreclosures, the unemployment and the bank failures that it created. No one with any sense wants a repeat of that experience. It might explain why so much real estate equity remains mortgage-free.” Here’s the big stat, 30% of the homeowners have over 50% of equity.
If you own a home and you are one of those people and you missed $2,000 payments a month for a year, now you owe $24,000 back to the bank. If you sold your house, you’ve got a $150,000 profit. It’s the simple payback to the bank with the profit. Even with your real estate fees and stuff, you are still making over $100,000. If you start getting the notices in the mail and you start getting all those letters that freak you out, you have an option to sell your house unlike we did in 2006 when people pulled out so much money and they had little equity.
Some of the negative Nellies love to bring up the forbearance because they think it’s a deep cut. They think they are getting into something that no one is talking about. They think they are smarty-pants. They want to prove that the sky is falling. Here’s what you can say to them or what I have been telling people, that is a fact, 1 in 10 homeowners in forbearance has less than 10% equity in their home. If all those guys who have less than 10% run into trouble and their homes need to go to foreclosure, I and all the buyers will be stoked. Not for those people, we feel terrible for them but the market is not going to crash.
Based on my boots on the ground data that I have been figuring out, my twelve first-time homebuyers, if 10% of the 2.3 million homes go into foreclosure because they are under 10%, that means that there’s only going to be eighteen people writing offers the first week we go look at a house instead of twenty. It’s such a small number. It’s not going to put a dent in the demand. The massive foreclosure is about to come on the market. It’s highly exaggerated.
Ivy Zelman, the Chief Executive Officer of Zelman & Associates says, “The likelihood of us having a foreclosure crisis again is about 0%.” Zelman is a big name in real estate. If you think a couple of clicks on Google mean that you know more about this guy, who has 30 years of experience and a guy who puts his reputation on those lines and he says, “0%.” Not could, maybe. He doesn’t hedge his bets. He says 0%. We have covered that topic.
Bail Outs: The Government Steps In
Let’s go-to topic number six, the bailout. What’s different this time? Here’s what I’m going to do. Bailouts are a tricky subject. I don’t want to start any political stuff. I have an article for you. I don’t care where you vote. I don’t care what you think the government should or shouldn’t pay for. There are facts. “In 2008, the government saw the foreclosure meltdown as a top-down problem and they set $70 billion aside for the banks and the Troubled Asset Relief Program, TARP.
Not all the $70 billion was used but the important point is that the government did not act in favor of homeowners. They acted in favor of the banks who lost their homes and foreclosures and short sales. This time around, the government has moved to help ordinary citizens working from the bottom up a little bit. An estimated $5.3 trillion went into the public in 2020.
Some of them went to some of the smaller businesses through the PPP, Paycheck Protection Program and the expanded unemployment benefits of tax incentives, and the help for local governments. In 2021, there has been $1.9 billion and the American Rescue Plan with millions of $1,400 checks, as well as proposals to spend trillions more. With that, bank deposits have increased by nearly $2 trillion during the past year and credit card debt has fallen.” If that ruffled your feathers, don’t email me, I don’t care. It’s numbers. I’m here to give you the numbers. I’m here to help people and serve those who want it, that’s all. That’s some numbers on the bailout.
The Real Estate Market Is Talking Bubbles
Those are all the topics and all the facts. Let’s get to some forecasts and predictions from people who are smarter than us. People are not trying to sell anything trying to get you to click on their advertisement or trying to get you to buy or sell a home with them. These are economists giving numbers. In a survey of a national panel of over 100 economists, these are real estate experts and investment, and marketing strategy experts, they forecast that home prices are going to be appreciating over the next five years but at rates that approach a more normal pace, not this craziness. If you are looking for the big score, sorry, you missed it. Unless you listen to my episodes in 2011 when I was running around talking to everybody but I didn’t have as in 2011.
They don’t see a bubble coming anytime soon and you could take a look at the numbers, the expected appreciation between 100 economists, both pessimistic and optimistic. In 2021, they think it’s going to be 8.66% and it’s probably going to get higher than that. In 2022, it’s 5.12%. In 2023, 3.7%. In 2024, 3.56%. In 2025, 3.33%. “Sidoni, you are just giving numbers. What the hell does this mean? I’m bored.” Four percent increase until 2025. Both people who see things happy and people who see things sad still think we are going to get 4% appreciation and no one said anything about a bubble.
There are a million charts and graphs with all kinds of other people and this is the one I like because you’ve got pessimists and optimists. If you believe the nerds who study those spreadsheets for fun and believe all the data I have shared with you, then maybe instead of worrying about the bubble, you see that 4% increase over the next few years. If you have a $300,000 home and you get 4% equity over the next few years, that’s about $50,000. These are low-interest rates so you can probably get into that home for about the same monthly payment as your rent.
I’m going to wrap it up with some more quotes from the experts. The reason I’m telling you this is because this is not fear-based stuff. You won’t see these on Google because it doesn’t sell anything. This is not anything optimistic or pessimistic. From Goldman Sachs, “Strong demand for housing looks sustainable. Even before the pandemic demographic tailwinds and historically low mortgage rates had pushed demand to high levels. Consumer surveys indicate that households buying intentions are now the highest in more than twenty years. As a result, the model projects double-digit price increases and gains in 2021.”
This one is from JP Morgan, Joe Seydl says, “Interest rates are historically low though they are inching up a little bit. Housing prices have spiked during the last few months but we don’t expect them to fall anytime soon. We believe they are more likely to keep rising. If you are looking at purchasing a new home, the conditions now may be better than twelve months hence.” That means it’s not going to be a bubble.
Morgan Stanley says, “Unlike more than fifteen years ago, the euphoria in home prices nowadays comes down to the simple logic of supply and demand.” That’s what Larry Yun said. We had Morgan Stanley conclude, “This time, the sector is on a sustainable and sturdy foundation. The robust demand and highly challenged supply along with tight mortgage lending standards may continue to bode well for home prices.” Higher interest rates and post-pandemic moves will likely slow the pace of appreciation but the upward trajectory remains much on course.
Finally, Merrill Lynch says, “There are reasons to believe that this is likely to be on usually long and strong housing expansion. Demand is strong because the biggest demographic in history is moving through the household formation and peak home-buying stages of its life cycle. Coronavirus-related preference changes have also sharply boosted home buying demand.” That means you decided, “I can’t be around my family because I have been stuck with them for eighteen months. Give me a bigger house with a basement so I can run away.” Back to Mr. Merrill Lynch, “At the same time supply is unusually tight with available homes for sale at record low levels. Double-digit price gains are rationing the supply.”
There we go. For the record, I have dozens of these quotes and they come from many of the people and names that you know and respect. Not all of them use the word hence but they are still pretty legit. Let me straight up, regurgitate, summarize and share with you an article from an economic writer who wrote a five-part series in May 2021 and it’s called Bubble Trouble. It’s like he wrote it for me. He looked long and hard at both sides and he wrote five parts. In his final article, part five, he concluded this. I’m going to share this with you because this is a paid publication so it’s not plastered all over Google. It’s for nerds like me who pay for it.
This is Matthew Gardner and here’s what he says, “On face value, I can certainly see why some are worried about how much home prices have been escalating not during the pandemic but since the housing prices started recovering back in 2012. Home price growth has been outpacing wage growth for a long time with median prices up more than 113% since January 2012 while wages have only arisen a mere modest 30%. Moreover, in 2020, prices increased by more than 9% and we are up a record-breaking 17.2% from March 2020 to March 2021.”
“As a result, the mumblings of the imminent bursting of a new housing bubble are now being heard across the United States. I would like to start by addressing those who believe impending doom is on the horizon. I’m afraid I have some bad news for you, it’s not going to happen. While it’s easy to argue that such a rapid increase in home prices is sure to end badly as it did in 2008 and 2009, you would be wrong to conflate those two time periods. The housing market nowadays is markedly different from the one we saw back in 2008.”
[bctt tweet=”Barring a global economic meltdown, the real estate market shouldn’t burst. It’ll just annoyingly slow leak.” via=”no”]
If you are still here, you want to buy a house or you are a real estate dork and I love you for taking the time to learn this information, not for me but you. The more you know, the better you are informed, the better deal you are going to get and the more financially stable you are going to be for your family and your future or you and your dogs. Maybe that’s your family.
Bubble, you decide. I hope this information was valuable for you and if you want to know more about buying your first home, check out all the other episodes of this show. Go through it and find something that you are interested in and pick your favorite. Remember, if you pick one of the early ones, they are a little rough and the sound stinks but you can learn all that you need to know, even if it’s a little painful. Don’t judge me.
Check back for more information. If you need a unicorn real estate agent in your area, then DM me on Instagram, that’s @DavidSidoni, or go to DavidSidoni.com or HowToBuyAHome.com. Hit me up if you’ve got any questions about real estate or you want to find a unicorn agent in your area who treats first-timers the way they should be treated. I’m helping people all over the country find these great people. Hopefully, you can also find this on YouTube someday because it might be on camera. You can also find me on the Facebook page. Bubble or no bubble, you decide, you make your plan and buy your home whenever. Even if you are going to wait, you might as well start your plan right now. If you don’t think it’s going to be a bubble and you want to get started, remember, you can do this.
Important Links:
- National Association of Realtors
- Episode 29
- Episode 40
- Freddie Mac
- Meyers Research
- Zelman & Associates
- Catch-22
- Episode 3
- Episode 8
- Bubble Trouble – Article
- Part five – Bubble Trouble: The impending ‘bubble burst’ is mythical at best
- YouTube – David Sidoni
- @DavidSidoni – Instagram
- Facebook page – How To Buy A Home
This podcast was started for YOU, to demystify things for first time home buyers, and help crush the confusion. After helping first timers for over 13 years, I knew there wasn’t t a lot of clear, tangible, useable information out there on the internet, so I started this podcast. Help me spread the word to other people just like you, dying for answers. Tell your friends, family, and perhaps that random neighbor you REALLY want to move out about How to Buy a Home! A really easy way is to hit the share button and text it to your friends. Go for it, help someone out. And if you’re not already a regular listener, subscribe and get constant updates on the market. If you are a regular and learned something, help me help others – give the show a quick review in Apple Podcasts or wherever you get your podcasts, or write a review on Spotify. Let’s change the way the real estate industry treats you first time buyers, one buyer at a time, starting with you – and make sure your favorite people don’t get screwed by going into this HUGE step blind and confused. Viva la Unicorn Revolution!
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