Equity Matters: Housing Bubble??

Judy Meredith
“The Mortgage Professor”
Hawaii Area Manager
Direct: (808) 222-7903
NMLS ID: 716323

On Monday, April 4th, I turned on the news at 530am and it seemed every channel was talking about the “Housing Bubble”. Almost overnight, it appeared that real estate reports went from informing us it was a “great time to buy” to “watch out, there is a housing bubble”.

There has been no shortage of theories on how the ongoing housing boom is going to end; the reopening of corporate offices is supposed to squeeze down on remote workers buying in distant places, the wind down of the Fed’s mortgage forbearance program is projected to propel additional inventory onto the market, and with inflation continuing to skyrocket, it is thought that home shoppers will pull back. So far, nothing has done much to slow down the housing frenzy. But the red-hot housing market now faces its biggest adversary… soaring interest rates.

On Tuesday, April 12, 2022, Bankrate.com showed the average national rate for the benchmark 30-year fixed mortgage was 5.14%. Meanwhile, the average national 15-year fixed rate was 4.35%. Comparatively in June 2021, the average national average for a 30-year fixed was 2.98% and the 15-year was 2.16%. For a loan size of $800,000 in Hawaii, this translates to an increase in monthly payment of about $1000 per month. It also drops the pre-approval amount for the average Homebuyer by about $200,000. So, if you were pre-approved at $800,000 last year for a single-family residence, then your new preapproval amount today would be $600,000. With the median home price in Honolulu County for a SFR being at $1,050,000, there is even less opportunity for Homebuyers.

So, the paramount question is…. Is there a housing bubble and how can you leverage this situation as a Homebuyer? A “housing bubble” (AKA a “real estate bubble”) is generally defined as a period of unexpected or unusual growth in demand for real estate and housing, paired alongside a sudden spike in home prices. These circumstances occur when demand greatly outpaces supply and homebuyers are faced with a limited number of choices, causing prices on available houses to go up as a result. As the Homebuyers continue to bid up the market, home prices rise significantly and when supply eventually realigns with demand, the bubble can “pop”. This then causes a rapid and pronounced dip in the number of home sales and the average price of homes.

Inflation is on the rise. So interest rates are on the rise. Inflation and rates tend to move in the same direction because interest rates are the primary tool used by the Federal Reserve, the U.S. Central bank, to manage inflation. By raising interest rates, the Fed can then slow the housing market, which they hope will help with housing affordability issues.

When borrowing costs are increased, rising interest rates discourage consumer and business spending, especially on commonly financed big-ticket items like housing. Rising interest rates also tend to weigh on asset prices, reversing the wealth effect for individuals and making banks more cautious in lending decisions. We have already started to see banks rescind some of their more creative loan programs to limit risk. All of this means that there will be less Buyers, as families get priced out of the market. If the Fed’s strategy takes hold, then the market will slow immensely as home affordability is contradicted by increased housing payments. Investors will also take a hit on their cashflow. Condominium maintenance fees will continue to rise as inflation impacts energy and resources.

But, on the bright side, less Buyers means less competition. Over time, the home prices should stabilize and become more affordable in the long run. This will bring opportunities for the prepared and proactive Homebuyer and Investor.

The current fear is that we are headed for another financial crisis as we saw in 2008. The main difference with today’s market is that the housing inventory continues to remain at an all-time low. Many Homeowners have equity in their homes as well as a 30-year fixed mortgage with a low monthly payment. But, it will be a “needs” based sale environment. I believe we will see larger land and investment property real estate portfolios being offered up for sale as the Owners prepare for their heirs and implement their legacies. This is going to be a great time to buy, so get ready now by being pre-approved with a great Lender.

The key to navigating the changing mortgage climate is to be sure to align yourself with a knowledgeable mortgage expert that can lead you to financial success. At PRMG, our motto for 2022 is No Homeowner Left Behind, because we pride ourselves in offering traditional as well as creative financing options for those who may find themselves “outside the box”.

We have a dedicated team of Mortgage Experts to help you and we offer free consultations! Visit https://oahu494.prmgapp. com/HonoluluTeam.html or call (808) 427-8800 today to book your appt with one of our Specialists!

Questions for Judy Meredith? “The Mortgage Professor”

Email me: I welcome the opportunity to help You find solutions! jmeredith@prmg.net