Are we in a housing bubble?

As prices continue to climb many are wondering if there’s going to be a pop similar to the financial crisis.  Here is the reality of mortgage and housing market…

The financial crisis was brought on by the subprime meltdown. The subprime mortgage products that were available led to the financial collapse of America and the better part of the world. Fast forward to 2016, home prices have risen near the levels of the housing market just before the crash. Many are asking and wondering are we currently in a housing bubble?  Here’s some things to consider on the big picture:

The overall economy– unemployment is low, wage growth is strong and the tech sector is hiring in droves. The Federal Reserve recently tightened interest rates and they’re likely to raise rates again in the near future as the economy continues to grow.

Mortgage requirements-despite what many will tell you getting a mortgage is intense. It requires full documentation including tax returns, pay stub’s, letters of explanation, and thorough due diligence. As long as strong requirements remain in place to secure financing one thing is for sure a financial collapse, if it does happen, will not spawn from abusive lending practices.

Housing Risks-let’s say you’re putting off buying a home because you’re worried about another financial crisis. You need to define what it is that you are really most concerned about. If you’re concerned about your job and the future of your income, that should play a bigger role in whether you decide to buy a home or not. If you’re financial house is in order, but you are still not sure about buying a home because you’re worried about the market being in a bubble. You should ask yourself “Why am I buying a house to begin with?”  If your intention is to buy house try to capitalize on some market appreciation and then quickly turn around and sell, yes you should be concerned about not being able to recoup your investment as real estate is a long-term hold vehicle. If however you were looking to purchase a home to have a roof over your head, enjoy the home, and live there for the next 5 to 7 years at the minimum you’re probably going to do very, very well for yourself. This also includes the additional tax benefit you’re going to have that you don’t have renting.

Market-ultra low mortgage rates have been here for the last few years. At some point interest rates are going to have to go up. The question becomes when. If you’re trying to purchase a home and you are qualified at a 3.625% 30 year fixed rate for example and interest rates rise to 4.375% you might not be able to qualify for as much house. If you look at that scenario on a macro level, rising rates means lower house prices. Rising rates also means less mortgage loan origination’s which means profitability in the secondary market diminishes. The only way to keep the profitability going is to keep the engine going with new loan originations and the only way to ensure volume continues in a higher interest-rate environment is to implement less restrictive underwriting. Looser credit to the degree of the financial crisis is unlikely, but it might mean slightly higher debt to income ratios on conventional loans and a bit more leniency for self-employed borrowers for example. That’s the only practical offset to rising rates while supporting the housing market.

Should you buy a house or not? That depends on whether or not you are comfortable with the interest rate and the payment that you’re getting and whether or not you feel that you can afford that payment for the long-haul. If you can afford the payment and property hold time is long term you’re likely in a safe position. If you’re unsure about the future of your finances, perhaps buying a home right now is not in the cards.

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