Home values are on the rise in nearly every corner of the United States, and that is certainly true here in Florida. At the end of September, the median single-family home in the state had jumped in price by 12.5% – increasing from $199,900 to $224,900 – over the course of the twelve months prior. This means that the typical homeowner saw their property gain more than $2,000 in value every single month. For some, especially in South Florida, that increase in equity was much greater.
Because of this rapid movement, as well as a number of other factors, many homeowners and even some industry insiders are worried that we might be entering into another housing bubble.
There’s no denying that many current conditions appear similar to those we witnessed at the height of the real estate boom. But is there really legitimate cause for concern? Are we already in another housing bubble? Are we on the road to another market collapse as well?
Before anyone panics, let’s look at both sides of the issue.
Why Some People Are Worried
It’s easy to see why some people are worried about the condition of the housing market, especially here in South Florida. If you’re keeping an eye out for signs, there’s no doubt you’ll find plenty of similarities which could indicate trouble may be on the horizon:
- Home Values Are Appreciating Rapidly – To many people, the biggest red flag waving toward a housing bubble is the fact that home values are appreciating at a pace that well exceeds inflation and historical trends. While Florida as a whole witnessed a 12.5% increase in median home value, some major cities have seen year-over-year gains as high as 19.2%
- Low Down-Payment Mortgages Are Gaining Popularity – In 2005, lenders and mortgage brokers were offering tons of low down-payment mortgages. Some of those required absolutely no money down. In some cases seller would cover buyer’s closing costs, which were then wrapped into their loans. Now, Fannie Mae and Freddie Mac have begun offering loans with just 3% down to first-time buyers – a group which is often the least financially stable demographic of homeowners.
- Lenders Are Utilizing Alternative Credit Scores to Qualify Borrowers – At the peak of the last boom, a number of companies offered stated-income mortgages. These loans did not require borrowers to provide proof of income or assets. Today, some lenders using alternative credit scores in order to qualify borrowers who may not otherwise qualify under traditional measures.
- There’s Considerable Investor Speculation – Large numbers of people (some of whom who really didn’t know much about real estate) made a bunch of money investing in and flipping properties in 2004 and 2005.
Even larger numbers (many of whom should have known better because they did know something about real estate) got hurt by those properties. If you weren’t involved in the market yourself, there’s a good chance that you know someone who was.
Now investors are appearing in increased numbers again, fueled both by the rapid rise in real estate values, as well as the huge spike in rental rates happening in major markets all over the country.
What Makes the Current Market Different?
We’ve all spent the past ten years watching the real estate market collapse, remain stagnant, and then slowly begin to rebound. So it’s easy to notice the similarities between then and now.
But what about the differences? And is there really a serious reason to worry? At the moment, probably not. Here’s why.
- More Federal Regulations on Lenders – Prior to the Dodd-Frank Act of 2010, mortgage lending was kind of like the Wild West – there were laws in place, but banks managed to get around them and do just about whatever they wanted. This led to countless instances of predatory lending practices, especially involving subprime borrowers. Because of Dodd-Frank, lenders are now required to obtain much more documentation from borrowers, and are prohibited from issuing certain high-risk loans including those with negative amortization and specific types of balloon payments.
- New Construction Is Increasing Slowly – One huge issue that contributed to the market collapse in 2006 was the rapid spread of new construction. The market was so hot that builders were speculatively building as many homes as they could. But then when things began to cool, these companies were left with tons of unsold inventory. Combined with the endless sea of foreclosed and bank-owned properties, this pushed home values down even further. Today, however, new construction is moving slowly – which is a good thing for the market – especially in major cities with stricter building laws and less undeveloped space.
- All-Around Tighter Lending Standards – While there are government-backed 3% loans now being offered – and lenders are using alternative credit scoring to qualify some applicants – by-and-large there are much tighter internal underwriting standards among financial institutions and mortgage lenders. Changes in programs may be helping some new buyers, but banks aren’t lending to just anyone anymore.
The paperwork standards for new mortgages have gone to the opposite extreme of where they used to be. Today, banks and double and triple checking every aspect of the transaction. As a result, mortgages take longer to process.
- Consistently Low Mortgage Rates – Over the past five years or so, mortgage rates have been near an all-time low. After having dipped down to around 3.5%, the average 30-year fixed mortgage is presently just under 4.0% – still far below historical norms. So while the inevitable rise of interest rates may trim affordability and slow buyer demand, there are far fewer adjustable-rate mortgages – one of the biggest culprits of the past decade – out there to be worried about.
What Does This All Mean?
Overall, the national real estate market looks good, but some local markets may have a tougher time than others. Fueled by international demand, home values in South Florida have risen more than many other locations. And while employment opportunities and salaries are up, they’re not growing quickly enough for many prospective local buyers to make homeownership an affordable reality.
But despite this and other cautionary signs, most experts agree on this viewpoint: while we may see a slow-down in property value growth, there’s little-to-no chance of repeating the drastic drop in value seen over the past decade.
New Harbor Realty