August 2021 Real Estate Market Update

August 13, 2021

august calendar

Let’s begin this month with the burning question: Are we in a housing bubble right now? We know home prices have increased drastically and quickly this year.

Year-Over-Year Price Appreciation Percentages Are Accelerating according to corelogic.com. January 2021 10%, February 10.4%, March 11.3%, April 13%, and May 15.4%

According to CoreLogic, year-over-year price appreciation is accelerating.

There are marked differences in today’s run up in prices compared to 2005, which was a bubble fueled by risky loans and lenient underwriting. Today, loans with high-risk features are absent and mortgage underwriting is prudent. Dr. Frank Nothaft, Chief Economist at CoreLogic

Mortgage Originations with < 620 FICO Score were $376 billion in 2006 and $74 billion in 2020 according to the Fed where reference can be found at https://www.newyorkfed.org/microeconomics/hhdc/background.html

The Fed just came out and said that back in 2006, $376 billion worth of mortgage loans were originated with a credit score of 620 or lower. Last year, it was just $74 billion. Buyers today are more qualified.

These outsized increases have raised concerns that a home price bubble is emerging. However, conditions today are quite different than in the early 2000s, particularly in terms of credit availability. The current climb in house prices instead reflects strong demand amid tight supply, helped along by record-low interest rates. - State of the Nation’s Housing 2021 , Joint Center of Housing Studies at Harvard University

The 30-year fixed rate sits at 2.8% right now. Last year that hit a new low 16 times, but let’s take a look at credit availability according to NAR’s Mortgage Credit Availability Index.

Historical Data for the MORTGAGE CREDIT AVAILABILITY INDEX Was at 868.7 during the housing bubble and 129.9 today according to MBA where the reference can be found at https://www.mba.org/news-research-and-resources/research-and-economics/single-family-research/mortgage-credit-availability-index

With this index, the higher the number the easier it is to get a loan. It is obvious we have no where near the credit availability we had back then. Just this past year, mortgage products have left the market, and credit has tightened. Back in the housing crisis demand was inflated, whereas today that demand is real and people are buying homes they can afford.

Household Debt Service Ratio for Mortgages as a Percentage of Disposable Personal Income from 1980 to today. Total quarterly required mortgage payments divided by total quarterly disposable personal income. In 1980 Q1 at 4.38%, 1991 Q1 at 6.22%, 1998 Q4 at 5.46%, 2007 Q4 at 7.21%, and today at 3.45% according to the fed where reference can be found at https://fred.stlouisfed.org/series/MDSP

Taking a look at mortgage debt and affordability, here is the Fed’s report on the household debt service ratio for mortgages as percent of disposable personal income (the money you have left over after you have paid your taxes). At the height of the housing crisis, the mortgage or the household debt service ratio was 7.21%. Today, we are just under 3.5%. We are in a very, very different situation.

Looking back at the bubble years, house prices exceeded house-buying power in 2006 nationally, but today house-buying power is nearly twice as high as the median sale price nationally… Many find it hard to believe, but housing is actually undervalued in most markets and the gap between house-buying power and sale prices indicates there’s room for further house price growth in the months to come. - Mark Fleming, Chief Economist at First American

There are two topics when it comes to affordability. One is affordable housing, which typically refers to homes on the lower end of any market. Housing affordability refers to what the dollar will buy. While there is no doubt we need more homes in the lower end of the markets across the country, here we are talking about housing affordability.

Housing Affordability Index 1990 to Today was between 108 and 138 until the housing crisis, up to 197 during the crisis, and between 148 and 168 in the past several years according to NAR where reference can be found at https://www.nar.realtor/blogs/economists-outlook/housing-affordability-declines-as-prices-continue-to-rise-and-incomes-fall

When we hear that homes aren’t as affordable today, we have to ask: As compared to when? Over the last couple years homes were more affordable than they are today, but as compared to 3 years ago, they are actually more affordable today.

Affordability continues to decrease. 186 in January, 171.3 in February, 175 in March, 155.8 in April, and 151.7 in May according to NAR where reference can be found at https://www.nar.realtor/blogs/economists-outlook/housing-affordability-falls-in-may-as-home-prices-rise-faster-than-income

Here is where affordability stands according to NAR from January through May. It is likely that affordability will become more of a challenge before it gets better. Remember that affordability is based on several components: home prices, interest rates, and wages. Interest rates are forecasted to increase. Home prices are forecasted to increase. Both factors will eat into affordability. This is not a housing bubble. It’s a supply-and-demand issue.

The main driver of the housing shortfall has been the long-term decline in the construction of single-family homes. -Sam Khater , VP & Chief Economist, Economic & Housing Research at Freddie Mac

Single family housing units completed in the past 13 years is far below the 50 year average where the mid-2000s saw 4 consecutive record high years of new construction according to the census where reference can be found at www.census.gov/construction/nrc/xls/co_cust.xls

Completed single-family houses has been below the 50-year average for the past 13 years. We don’t have enough homes to keep up with population growth across the country, and that has fueled this spike in prices. As interest rates and prices rise, we will not see depreciation, but a slower appreciation going forward.

 

Moving on to the next burning question: Are we going to see a wave of foreclosures coming to the market?

Original forbearance % was nowhere near projections and has been cut in more than half since then. Original projection at 30%, actual highest in May was 8.47%, and 3.5% today according to first American and MBA where references can be found at https://blog.firstam.com/economics/this-time-its-different-why-a-wave-of-foreclosures-is-unlikely and https://www.mba.org/2021-press-releases/may/share-of-mortgage-loans-in-forbearance-decreases-to-422-percent

Let’s take a look at where experts originally projected forbearance would lead. Initially, experts said 30% of all mortgages would go into the forbearance program, and all of those would lead to foreclosures. In reality that number topped out at 8.47%, and today it’s down to 3.5% or 1.86 million mortgages.

The number of mortgages in active forbearance is now under 2 million. In 2020, this number was 4.76 million in may, 3.93 million in august, 2.97 million in November, and 1.86 million today according to McDash Flash Forbearance Tracker where reference can be found at https://www.blackknightinc.com/blog-posts/

1.86 million mortgages is great progress from where we started with nearly 5 million mortgages in forbearance in May of last year. So… what happens when homeowners exit the forbearance plan?

Upon exit from forbearance plan: 44.1% were paid in full, 38.7% worked out a repayment plan, 17.2% were still in trouble, 1.5% Repayment plans, short sales, deed-in-lieus, Cumulative forbearance exits for the period from June 1, 2020 through July 11, 2021 According to MBA where reference can be found at https://www.mba.org/news-research-and-resources/newsroom

Most homeowners (44.1%) are exiting the forbearance plan are walking current on their payments or with a modification plan. However, 15.7% are exiting forbearance without a loss mitigation plan. The silver lining here is that, according to Black Knight, nearly 87% of homeowners in the forbearance plan have at least 10% equity. That means they can sell their home, protect their investment, and avoid the foreclosure process.

Between 2006 and 2014, about 9.3 million households went through foreclosure, gave up their home to a lender or sold in a distressed sale. - Wall Street Journal

Experts are saying that the number of homes that could still go to foreclosure is roughly 200,000 to 300,000 mortgages. Our hearts go out to anyone who ends up in this situation. It is nothing we would ever want to see happen to so many after such a tough year. However, it is a much better situation than the 9.3 million homes that went into foreclosure between 2006 and 2014.

The likelihood of us having a foreclosure crisis again is about zero percent. -Ivy Zelman, Founder of Zelman & Associates

With today’s low inventory, foreclosures will not cause massive price declines.

Buyer traffic decreasing from April to June according to nar where reference can be found at https://www.nar.realtor/research-and-statistics/research-reports/realtors-confidence-index

In other news, the housing boom is finally over. According to NAR’s Buyer Traffic Report, you can see home sales dropping to new lows. In April of 2021, there was very strong buyer traffic (dark blue). As the map get lighter shades of blue in May and June, it is obvious there is stable traffic, but there is no longer a sense of urgency in the market.

Monthly index according to showingtime where we saw a high of 283.8 in February fall to 236.1 in may and 205.3 in June where reference can be found at https://showingindex.stats.showingtime.com/docs/lmu/x/UnitedStates?src=page

However, we are still ahead of where we were this time last year.

… given that the sales activities are coming down, we may be sensing some turn in the market. We are seeing less prevalence of multiple offers. It is still a seller's market, no doubt… Still a sellers' market, but people need to be very cautious how they price their home to attract buyers, knowing that these sales activities are declining somewhat. -Lawrence Yun, Chief Economist at NAR

We are clearly in a seller’s market, but we are on the front end of this shift in real estate coming out of the last year.

Month inventory of homes for sale show we are still very much in a sellers market (less than 6 months inventory on hand), a neutral market is 6-7 months on hand, and a buyers market is more than 7 months on hand according to nar.realtor where reference can be found at https://www.nar.realtor/topics/existing-home-sales

In summation, there is no prediction for price decline, but appreciation will slow as we go into the second half of the year.

At a broad level, home prices are in no danger of a decline due to tight inventory conditions, but I do expect prices to appreciate at a slower pace by the end of the year… Ideally, the costs for a home would rise roughly in line with income growth, which is likely to happen in 2022 as more listings and new construction become available. - Lawrence Yun, Chief Economist at NAR

Below is how we wrapped up August in the Tallahassee. These numbers trend with a typical August, because even though we have a low supply of homes across most price ranges, we are filling the demand.

August 2021 Tallahassee Residential Listings: 881 listed, 657 sold, 74.6% sold, $264,668 average sold list price, $262,918 average sold sale price, 39 days on market, 5.1% listings expired, $25,358 average unsold list price. Kelly Chavers, REALTOR

tallahassee is seeing more listings than in the previous few years

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