COMING REAL ESTATE CRASH?

Is a Real Estate Market Crash Coming?

There has been plenty of discussion throughout the industry and from seller and prospective buyers alike on the prospects of a real estate market crash similar to what occurred 10 years ago,

Here is what we know…

2005-2007/2008

One factor contributing to the last crash was the unstable investments financial institutions and hedge fund managers made in the derivatives market.

After a bank loans money to a home buyer, the bank sells the mortgage to Fannie Mae (the bank in turn is able to lend more money to borrowers). Fannie Mae packages up the mortgage with others and resells them in the secondary market as what is termed a Mortgage Backed Security(MBS).

Then the MBS is purchased by a hedge fund that finds loans with high interest payments like risky interest only loans and those portions of loans are then re-sold to other hedge funds, which can work out pretty well until…..home prices declined, interest rates reset, and there are massive defaults in mortgages.

One reason for the defaults was the types of loans being approved during the period of the early to mid 2000′s which included adjustable rate, and the aforementioned interest only mortgages.

Interest rates climbed fast and steadily but demand took a nose dive along with prices/home value. Since good and bad loans were packaged as MBS’s there was no way to determine which portions were worth nothing. The secondary market came to halt with banks and hedge funds holding derivatives they were unable to sell, and then banks stopped lending at all out of fear of purchasing a bad collateral product (the defaulted derivative).

During the robust years of the early 2000′s, home owners took out equity for large purchases and ended up with under water mortgages when prices dropped. A sagging economy, inflation/recession and slow job growth spelled doom for many home owners who ended up walking away from their homes or being foreclosed on when they could not make the notes…..the defining moment of the ‘crash’

Reason for the fear today.

The escalation in home prices/value, especially over the last two years, coupled with rising interest rates which are expected to reach 5% by the end of 2018 have augmented fears of another crash. The primary concern is that prices will peak at some point then fall off drasticly, if the ecomony takes a tailspin.

The Trump tax plan is expected to adversely affect high priced states like California where the mortgage interest deduction is capped at $10,000.00. It has been estimated that some properties in the state could lose 10% in value this year outpacing the 7% gains over the past year.

What’s differant in 2018

Lending standards have shifted in the last ten years as underwriters as mortgage lending tightened their standards to prevent a repeat of 2005-2007.

In 2015 the amount of subprime loans barely topped 56 billion which is over 570 billion less than the period of 2005-2007; this due in large part to the shift towards conservative lending underwriting policies.

Interest rates are going up but at a much slower pace than 10 years ago

Economy is still strong; there is job growth so many millinnials are seeking to beat the rising rates by purchasing now, which is fueling demand; however, with Canadian lumber tariffs slowing developers from building tract homes and many home owners on the fence about selling, inventory is low(seller’s market).

Future concerns

Treasury yields inverting is a concern for the future. This would be where short term notes/bonds out perform long terms ones thus creating a crash in the real estate market.

There is also a mindset throughout several economic sectors that believe in ‘crash’ cycles of 15-18 years which many people have believed since the 1930′s when real etate economist Homer Hoyt developed a methodology for this that was used by 1990′s economist Fred E. Foldvary, who predicated a crash in 2006

The verdict is still out but real estate investment is still one of the most stable in all the financial world and will continue as such.