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Silver Lining to Deflating Housing Market Bubble

Tue Apr 5, 2022 on Blog

Silver Lining to Deflating Housing Market Bubble

Various economists are predicting that the home price growth will slow down. If this does not happen, home purchase prices will go further out of reach for homebuyers that the housing market overall will overheat. Already there is far more demand than supply, and far less affordable homes in reach of potential purchasers.

While most of these economists prefer the housing market to return to “normal” rates of growth, there is always the concern of a housing bust. That said, the Mortgage Bankers Association predicts that U.S. existing home prices will jump 4.8%, representing the housing market normalizing back to its historic rate of growth of 4.6%.

U.S. home price growth

Year-over-year change in home prices

Chart: Lance Lambert Courtesy S&P DOW JONES INDICES LLC; CORELOGIC

Why is home price growth slowing down?

Increasing mortgage rates is one reason for the slow down. The forecast is that 30-year fixed mortgages will average  4.5%— up from 3.1% in 2021. Such higher interest rates place pressure downward on the housing market as some potential purchasers will now be ineligible for the loan amounts they want, while others will simply price out some home purchasers.

Mortgage rates are rising again

Average 30-year fixed mortgage rate

Chart: Lance Lambert Courtesy FREDDIE MAC

What about lending?

At the same time, mortgage credit availability which is a measure of lenders’ willingness to issue home loans, rose in February to its highest level since last May. Lenders are expanding product offerings and relaxing borrower eligibility requirements by providing bigger loans or lower upfront payments to provide and extend home purchasing.

Interestingly, lenders must find products to make sure that they obtain enough volume to stay in business. How can lenders do this? Usually, in business, one either discounts or has a sale in order to lure in customers. The concept of a sale is not necessarily used in the mortgage business; instead, lending is based on product types and availability. As a result, in our current market, people who before may have been ineligible to obtain a mortgage due to poor credit or particular circumstances are now being revisited by the mortgage industry.

Thus, if you are one of those people who previously have been denied for a mortgage, you may want to consider speaking to your mortgage broker to determine if in fact you should now reapply for a mortgage for which you may have previously been ineligible.

What does this all mean?

While it may be more difficult to obtain a mortgage now as interest rates rise, there is a shift in loosening credit, which may bring us back to pre-pandemic credit availability levels. The need for affordable housing still remains, and the overall demand for housing outweighs the supply. The result of all of these forces may be that we are on the verge of a housing bubble. While we may not face the housing crisis of 2008, all of these forces will inevitably disrupt the current housing market.

Stay tuned!

Roy Oppenheim

From The Trenches

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