There is no denying that the latest recession to hit America is still fresh on the minds of those that lived through it. In fact, the wake of the downturn still resonates on more levels than one. At the very least, people have made a conscious effort not to repeat the very transgressions that put us here in the first place. Now that the recovery has finally gained traction, however, people are worried that today’s appreciation rates are eerily reminiscent of those that led to the last meltdown.
Instead of fearing what the real estate industry has in store, investors should be embracing the current situation. “Real estate is Americans’ preferred investment for money that they won’t need for at least 10 years and that hasn’t changed,” said Greg McBride, chief financial analyst at Bankrate.com. “Nervous investors always look to real estate rather than shy away from it in times of volatility.” Now is actually a great time to invest. Our partners at CT Homes have found that today’s investor landscape offers very attractive opportunities.
Let’s take a minute to put your mind at ease. It is important to note that, while prices are high, the fundamental indicators in place are much different than they were in 2009. Truth be told, it is unlikely that the U.S. housing market is headed towards another crash any time soon. Let’s take a look at some of the reasons why a meltdown of 2009 proportions is unlikely in today’s market:
1. Interest Rates Remain Low
Following the economic disruption that shocked China last week, world markets have found themselves in a rather precarious situation. As a result, investors and economic observers alike have tried to predict whether or not the Fed will raise key interest rates this month. In fact, most of those in the housing industry for that matter have been patiently anticipating a rate hike for quite some time now.
Unbeknownst to many, however, is the fact that we may have already seen the hike. It has presumably come and gone without peaking as many thought it would. No more than a year ago, the 30-year loan rate was 4.10 percent and the 15-year rate was 3.24 percent. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage today increased to 3.89 percent from 3.84 percent in the previous week. Consequently, the rate on 15-year fixed-rate mortgages is now in the neighborhood of 3.09. The slight increase suggests volatility in the market, but is far from the hike many presumed.
In other words, rates have not climbed as they were expected to, and some experts believe that they will remain low for the foreseeable future. According to Kevin Finkel, senior vice president of Resource America Inc., recent market volatility has reduced the chances that the Fed will introduce a rate hike. “Clearly the risk of higher rates is diminishing right now, and that could bode well for real estate,” he said.
2. Less Risk Of Impending Mortgage Bubble
Over the past three years, appreciation rates have returned home prices to pre-recession levels. San Francisco and New York, in particular, have seen their real estate values inflate perhaps more than any other city – so much so that the average person couldn’t even imagine owning a home in either metro. Prices have increased in almost every major city, and people are starting to notice similarities between today’s prices and those at the onset of the latest recession. However, it is important to note that fundamentals are in a different place today than they were in 2009.
For starters, banks have taken every step imaginable to prevent another meltdown. The transgressions that led to the collapse have been accounted for and improved upon. No longer is the market fueled by loose credit standards. Changes to mortgage standards have improved lending standards and built a more stable foundation.
Essentially, it has become harder to receive loan approval, but that is by no means a bad thing. It was people that couldn’t afford their mortgages, among many other things, that initiated the fall of the housing sector in the first place. So while it may be harder for borrowers to afford a 20 percent down payment, their initial equity is enough to keep them in their homes. The move has certainly reduced the amount of foreclosures across the country. According to RealtyTrac, foreclosures are at a 10-year low, somewhere in the neighborhood of 45,000.
3. First-Time Buyer Assistance
Outside of stricter mortgage guidelines, some initiatives have been put in place to assist prospective buyers. At the beginning of this year, the Federal Housing Administration (FHA) moved to reduce insurance premiums by as much as $900 a year on average. The idea is to persuade first-time buyers and millennials to make the transition from renting to purchasing. With the end of the year rapidly approaching, the initiative appears to have worked. By the second quarter, FHA loans represented 23 percent of all financed purchases. That is a four percent increase since the previous year, according to RealtyTrac. Optimists remain encouraged that the move to reduce mortgage insurance premiums could push home sales up to 5.6 million, the most we have seen since 2006. The National Association of Realtors (NAR) believes that the move will directly introduce up to 140,000 new buyers to the market.
Of course, reducing the amount people may pay towards mortgage insurance premiums was not the only move made to make homeownership more attractive. Fannie Mae and Freddie Mac also announced that they would begin backing loans with down payments as low as three percent. The previous minimum was five percent, meaning prospective buyers will not only be able to put less down, but also pay less on mortgage insurance premiums. Of course, the two mortgage giants will require mortgage insurance on those loans with a down payment smaller than 20 percent. But the fact remains: large down payments are no longer as big of an obstacle as they used to be.
4. Job Creation
Job growth is a good indicator as to the direction the economy is heading. Having said that, it is not a coincidence that the U.S. has simultaneously progressed throughout a rather sizable recovery and added jobs at a steady rate for the better part of five years. In fact, most of the jobs that were lost to the recession have been brought back.
“The economy continues to create jobs, and the quality of jobs being created has improved as the economic recovery has progressed, with professional and business services leading the way. This is indicative of an economic recovery that is sustainable,” said Greg McBride, chief financial analyst with New York-based Bankrate.com. Of course there are still several issues in the job sector that need to be addressed before it even turns a corner, but recent progress has been good enough to boost the housing sector and lure would-be millennial homebuyers off the proverbial fence.
“If wage growth materializes in a broader way, this will be the catalyst for many existing homeowners to put their homes on the market and finally look for the move-up buy, boosting housing and alleviating the inventory shortage,” McBride said.