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2013-07-25 11:30:42
Rising Market in Daybreak Sign of a Bubble?

real estate market in daybreak utah Today I wanted to share some information on a topic of conversation that has come up a couple times in the past few weeks as I have been talking Utah Real Estate with family and friends. One of the trending topics seems to be - 'is the rising real estate market in daybreak a sign of a housing bubble'? And guess what? I have good news so read on!

Even without looking at numbers, signs of the continued recovery of the housing market in Daybreak have been easy to observe over the past months. In fact, the Federal Housing Finance Agency recently reported that home prices in Utah are up 10.5%. You have probably noticed that homes in Daybreak are selling with fewer days on market and the values of homes are increasing.

The Salt Lake Parade of Homes is coming within the next few weeks and there are new lots that will be released over the next two months for new homes in Daybreak! Creekside Village Daybreak and Lake Village Daybreak will be the newest phases in Daybreak Utah and waiting lists are already available if you are looking to build a new home in Salt Lake. It is a great time to buy a home in Daybreak. Since the market is continuing to remain strong, it is also a good time to sell your existing home and cash in on the equity to use towards your next purchase.

So as I mentioned earlier, given the positive state of the real estate market and the increase of property values, some people are beginning to wonder if another real estate bubble is being formed. It is always interesting to hear other people's opinions on this topic. While doing some research on the topic of a housing bubble, I came across this article in the July 2013 issue of The Realtor Magazine. Rather than give you my take on it, I thought it would be interesting to share the view of actual economists on this topic. The article starts off with the following:

'Although home prices are likely to continue to rise in the next few years, the national market is not in danger of a bubble, according to prominent economists'.

Here is more information on the stability of the current growth in the real estate market from the recent article titled, 'Economists Temper Housing Bubble Worries'

Although home prices are likely to continue to rise in the next few years, the national market is not in danger of a bubble, according to prominent economists.

“Four of the next five years are likely to be improving years in the housing market. I don’t say five because there’s always the possibility of little hiccups in the housing market,” said Lawrence Yun, chief economist for the National Association of Realtors.“But we will still be shy of the bubble years of 2005.”

Yun spoke on a panel at the National Association of Real Estate Editors conference in Atlanta Friday along with Jed Kolko, chief economist for real estate search and marketing site Trulia, and Mark Fleming, chief economist for real estate data and analytics firm CoreLogic.

“Right now we are not in bubble trouble, even though prices are rising as fast as we saw in last decade’s bubble,” Kolko said. Prices are still 7 percent undervalued relative to incomes and rents, he said.

By contrast, home prices were 39 percent overvalued during the housing boom with some areas overvalued by up to 80 percent, he added. Kolko said there is no sign of overbuilding and little sign of overborrowing. “Prices would have to keep rising at the current rate for several more years to put us back in bubble territory,” he said.

He anticipates three factors will stem price appreciation before that happens: higher mortgage rates, fading investor interest and more for-sale inventory. Higher mortgage rates will likely dampen, but not kill, housing demand — even an increase to a 5.5 percent interest rate is still historically low, and buying would still be 33 percent cheaper than renting at that rate, he said.

Indeed, interest rates would have to rise to more than 11 percent for renting to be cheaper than buying, he said. {Wow, this is a great reason for first time home buyers to look at buying a home now to start gaining equity while fixed 30 year rates are still in the mid 4%'s}

“Of course, it’s different for different markets,” Kolko added, and his calculations assume borrowers will stay in their homes for seven years, among other assumptions.

A recent analysis by Trulia found that prices were overvalued in nine of 100 major metros: the California metros of Orange County (overvalued by 9 percent), Los Angeles (5 percent), San Jose (3 percent) and San Francisco (2 percent); the Texas metros of Austin (7 percent), San Antonio (5 percent) and Houston (2 percent); Portland, Ore. (1 percent); and Honolulu (0.01 percent).

 {Notice that these are also the markets that had some of the biggest drops during the prior housing market. Utah has traditionally had more stable gains and losses than some of these housing markets)

Fleming noted that the biggest problem plaguing the housing market is lack of equity. Given rapidly rising home prices, he expects the number of homeowners with negative equity will be back down to a historical norm of less than 1 percent in five to seven years.

All three economists said the housing recovery was on track. Yun said there was no danger of the economy slipping back into recession.

“Home price growth is rising very, very fast. Housing wealth is easily offsetting the impact of sequestration,” he said, referring to tax hikes made earlier this year at the federal level. Yun projects home prices for existing homes will rise 8 percent this year, followed by 5 percent next year.

He warned, however, that if price growth continues to easily outpace income growth, it will affect home affordability and run the risk of “creating haves and have-nots. The owners are smiling (and) the non-owners are frustrated that they cannot participate in” the market, he said.

Yun noted the national homeownership rate currently stands at 65 percent, down from a peak of 69 percent. “I think it’s going to go to 63 percent possibly, before stabilizing,” he said, though he cautioned that that doesn’t mean the housing market will decline. Younger generations will pull down the average, he said.

Yun expects existing-home sales to rise 6.7 percent this year to 4.97 million before rising to 5.3 million and 5.7 million in 2014 and 2015, respectively. “Home sales are essentially coming back to the (homebuyer) tax credit-induced sales (of 2010) even without the tax credit because of the better economy,” Yun said. But sales are still only at 71 percent of the past peak, he added.

New-home sales are only at 28 percent of their past peak — not because buyers don’t want them, but because builders aren’t building enough new homes, he said. Newly constructed homes inventory is at a 50-year low and, while recovering, housing starts need to rise by 50 percent to get to their long-term average of 1.5 million per year, Yun said.

Between 2009 and 2012, the average credit score for borrowers of approved Fannie Mae- and Freddie Mac-backed home loans ranged from 760 to 770, he said, noting that a “normal” average would be 720. If standards were normal, home sales would be 15 to 20 percent higher, he said.

Fleming questioned the notion that credit standards are too tight for homebuyers, however. “Averages are easily manipulated. It’s not about the average score. It’s about the tail: Are we giving credit to people with” low credit scores? he said.

An analysis of the spread of credit scores for those obtaining loans, rather than the average score, suggests the answer to that question is yes, Fleming said.

Compared to the late 1990s, when there was a “relatively healthy” level of credit availability, credit might be “modestly constrained,” but not too far off historical norms, he said. Denied loan applications may have an average FICO credit score of 720, he said, but they also have a loan-to-value ratio of 88 percent.

“What are they being denied for? Lack of equity,” he said.

Fleming said he did not know if there were better measures of credit availability, other than credit score averages, currently published. He noted, however, that the number of mortgage applications actually underwritten might be one measure. The share of mortgage applications underwritten stands at 15 percent, down from around 30 percent, he said.

Still, credit isn’t tight, “we’re just making it really painful and difficult” to get a mortgage, he said, suggesting the paperwork involved was likely daunting for many borrowers. {There are great rates still available and we work with an awesome lender that helps our Daybreak houses buyers navigate the process!}

Nonetheless, he anticipates that as interest rates rise and refinancings become a smaller share of mortgage originations, the competition for purchase loans may result in what he called “expansion of the credit box.”

As the pressure to offer more exotic loans than currently available rises, “the question will be: Have we learned our lesson in the industry?” he said.

 

 

 

 

 
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