Sunday, November 22, 2015

12 Reasons we’re absolutely not looking at another real estate crash.

Believe it or not, but the United States is rapidly approaching the 10-year anniversary of the 2006-2007 housing bubble that shook the foundations of the mortgage and real estate industry and let off rippled that led to the Great Recession. It may seem like just yesterday that we were in the midst of those dark days when there was little reason for hope or solace, but things are looking downright rosy now.

But a few financial analysts and media are crying wolf about the possibility of another impending crash in the real estate market. While it’s true that these cycles usually go through 7-10 year trends, remember that ups and downs in real estate values, interest rates, and the economy are completely normal, and it took a Titanic-like confluence of events for the last crash to occur. In large part, we’ve learned our lesson – and so have the banks, government regulators, and financial institutions that were asleep at the wheel – so we’re here to tell you with 100% certainty that we’re not looking at another real estate crash like in the mid 2000s.

Here are the first five reasons why we’re absolutely not looking at another real estate crash:

1. We’re back to responsible loans
Precipitating the mortgage meltdown and subsequent financial crash of the mid 2000s, a record number of homeowners opted for risky alternative loan products offered by the banks, hedging their bets against ever-rising equity. But the with interest-only, short-term ARMs, option ARMS, and subprime loans mostly out of the market these days, American homeowners are again opting for stable, safe, and conservative 30 or 15-year fixed low interest loans. The abundance of loan products that allowed people to easily access money from their equity has also tightened. Add it all up and we have millions of homeowners who are in position to succeed with their loans – not fail.

2. We have equity again
On the tail end of the Recession, interest rates were at historic lows, which in theory should have allowed the majority of homeowners to refinance into low fixed rate loans, saving them on their monthly payments and stabilizing their investments. But there was one important ingredient necessary for them to qualify for refinances: equity. But thanks to steady appreciation in most markets over the last five years, our average equity levels are about at Pre-Recession levels once again. When people have equity in their homes they have many more options - like refinancing, selling, etc. – and are far less likely to walk away, which means we won’t see the same flood of foreclosures and distressed sales again.

3. The Fed interest rate is low
The Fed has kept the rate tied to prime stable for a long time in order to spur the economy, but it’s everyone knows it’s just a matter of time (and Fed meetings) until they do start raising rates. That means mortgage rates will probably go up, too, but that’s actually a good thing for the economy in the long run, as it will signal we’ve reached a period of normalization and economic growth, and inflation fears will be contained. Look for interest rates to creep up gradually over the next year or eighteen months – but stay favorable.

4. Homeownership is near an all time low
Homeownership levels hit their highest point every at the end of 2004 at 69.2%. At the time, it was lauded as a great indicator of prosperity, but it turns out, that number was artificially inflated by a buying frenzy, no money down loans, subprime loan products, and risky loans that allowed buyers to get their keys – but often without a plan or stable finances. Homeownership rates have now dipped to 63.4%, which is the lowest since the mid 1960s. That means we don’t have an imbalance of homeowners compared to supply, and increased demand will probably even out those numbers over time near the U.S. 50-year average at 65.3%. More first time buyers - including a huge influx of Millenials who will be looking to buy in the coming years - means steady pressure on demand - and stabilization.

5. Foreclosures are way down
Foreclosures have fallen dramatically in the U.S. over the past five years, to only 1 in every 1,147 homes. In fact, a total of only 133,811 U.S. properties started the foreclosure process in the third quarter, down 14% from a year ago to the lowest level since 2005. That means the number of loans in foreclosures is 2.1 percent - the lowest level since 2007, according to the Mortgage Bankers Association. While there are a surprisingly high number of bank repossessions that are taking place, those numbers are padded by homeowners who lost their homes during the crash and the bank now finally taking them back – not due to the current real estate climate. The same is true of states with high repossession rates like Nevada, Florida, and California, which are feeling the affects of the bank’s glacier pace of processing zombie foreclosures – not because of new ones.

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Look for part 2 of this blog, where we map out the next 7 reasons why we are absolutely not looking at another real estate crash. And email or contact The Alfano Group if you ever have questions or need help! 

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