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Rising prices do not mean bubble trouble
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After cooling off slightly toward the end of 2021, home price gains reaccelerated to 19.2% in January, up from 18.9% in December.
In total, housing prices have risen more than 32% during the pandemic, a growth rate exceeding the runup before the famous Financial Crisis/Housing Crash of 2007, when the home market – and the economy – collapsed. Worries of a crash, and recession, are on the rise.
But there are big differences between now and then. The bubble preceding that crash was in part the result of rampant speculation and too-easy credit. Without enough regulation, banks lent to borrowers even if they did not have the financial wherewithal to pay the money back. When home prices crashed, millions of borrowers defaulted. The securities backing their mortgages collapsed as well.
Savvy investors who saw the weakness in these bonds had invested heavily in hedge funds betting against their success. The banks did not have the money to pay them off, and the financial dominoes began to fall - banks, insurers, and eventually jobs and the entire country.
Today lending regulations have tightened to assure ability to repay. As such, no price crash is likely.
But is a recession coming? It is hard to say.
In March 2022, the Federal Reserve raised interest rates for the first time in four years and signaled a far more aggressive posture toward inflation. Mortgage rates followed. Futures traders are betting on a total rate increase of 2.5%-2.75% range by the end of 2022.
Tightening policy amid rising inflation usually leads to investors selling out of shorter-dated Treasury in favor of long-dated government debt. When this happens the yields on these bonds often trade places - or invert.
Inverted yield curves sometimes signal looming recession, but analysts are hopeful that this time Fed policy is on the right track, with investors betting on strong jobs numbers and a booming economy.
For now, the mismatch between supply and demand is outweighing rising mortgage rates, though pending home sales - signed contracts on existing homes - have fallen markedly. Affordability has become the much larger concern.
The housing sector is especially important to the overall economy. Low interest rates undoubtedly helped fuel home price appreciation and rising rates may keep some first-time buyers from being able to purchase they home they want.
But it is hard to see any imminent crash. Demand is simply too strong while supply is too limited.
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Not intended to solicit loans in states I am not licensed in. Bay Equity LLC. Equal Housing Opportunity. This is not a commitment to lend or extend credit. Restrictions may apply. Rates may not be available at time of application. Information and/or data are subject to change without notice. All loans are subject to credit approval. Not all loans or products are available in all states. Bay Equity LLC, 770 Tamalpais Drive, Suite 207, Corte Madera, CA 94925; NMLS ID#76988 | NMLS consumer access: www.nmlsconsumeraccess.org/EntityDetails.aspx/COMPANY/76988 | Texas SML Mortgage Banker Registration #76988. Texas Recovery Fund notice, Click Here: https://texreg.sos.state.tx.us/fids/201203137-2.pdf | State Licenses: http://bayeq.us/114235.
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