Rise in Home Appreciation, is It Real?
by Michael Lam | Jul 05, 2015
Is the rise in home prices real or another bubble? You’re interested in buying a home, but you’re concerned you might be buying at or near the peak of a bubble. You want to know if the rise in home appreciation is genuine or fabricated by some bubble, right?
To understand if we are in another bubble, we must first learn from the 2007 crash and its cause. Prior to 2007, particularly in the four years between 2001-2005, home prices rose dramatically. A key factor in home appreciation during that time was subprime loans, which were being issued to borrowers who were considered more risky than a borrower with good credit. These barrowers really couldn’t afford a typical conventional loan. So what did these barrowers do? They took out adjustable rate mortgages expecting appreciation to increase until they chose to refinance or move on to another home (ideally before their interest-only term ends and they have to start paying back principal). This thought process has two problems; the first is the assumption that home prices will continue to go up and stay up. Second is the assumption you’ll be able to afford another home as prices do go up with income that is already suspect, thus needing to take out a “subprime” loan.
Watch for Adjustable Rates
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Adjustable rate loans are not bad loan programs. However, they can easily be abused by borrowers and loan officers who do not look out for the borrower’s best interest. These loans make it easy for people to take on more debt with a lower monthly payment. Generally, subprime loans offer you a very low rate, where you pay “interest” only and the principal repayment plan is scheduled for years in the future.
A good indicator that a bubble could be brewing is the popularity of adjustable rate mortgages. I know when I was investing in properties between years 2008-2013, subprime loans were not common at all and often discourage by loan officers. But, I recently noticed subprime loans becoming easier to obtain or solicit, as they have become more prevalent. It’s a little concerning , but it does make sense because interest rates for conventional loans are rising. Truthfully, I expect it to continue to rise over time. Generally when interest rises, adjustable rate mortgages become more favorable. It encourages people who can’t afford conventional loans to purchase a home they really can’t afford via the conventional way.
Keep this in mind: qualifying for a conventional loan is the best, most conservative approach to securing a property long term. The reason is a conventional loan is more strict and require full documentation. Subprime loans are no longer part of the mix after the crash that began in 2006 and 2007. You can be confident the loans being taken out now are qualified loans. The pure fact that subprime loans, also known as “no-doc loans,” are no longer available should help provide assurance the rise in home prices are real.
The people purchasing homes are people that provided full docs to support the debt they can carry with the home purchase. They are well within the lender’s DTI guideline (learn more about DTI here). It’s not these “subprime” homes pushing up prices. These are real , fully qualified people purchasing homes. The demand is real, the legitimacy of these borrowers are authentic. Since new laws were passed by RESPA, more disclosures are available and conveyed to borrowers, which makes it much harder to hide things from lenders.
Watch for Cash Buyers
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One caveat to note is the number of cash buyers out there. Getting these stats can be difficult, but pay attention to your market, number of homes for sale, and how fast they close. The general rule of thumb is if a home closes in less than 25 days, it’s most likely a cash deal. In comparison, a typical lender closes around 30 days (standard loans). The idea of tracking cash buyers is to understand their confidence in homes. A lot of cash buyers are investors; they have the money to buy a home quickly and flip it. As home values go up and cash buyers dry up, it’s a good indication home appreciation has reached a curve point and will either remain steady flat or start going downwards.
Regardless, you need to understand whether you can afford a home today under the strict guidelines offered by a conventional loan program. You must be confident that you can carry the loan. I wouldn’t try to “time” the market, as it is much like timing the stock market. It always go in cyclic motion, up, down and back up. If you look at historical trends, this manifests itself. But, if you look at the long term historical trend, you will conclude that home prices go up in value over time. In other words, you probably won’t see a home in your area go back down to the 1980’s home prices, but instead you can expect home values to fluctuate. Rates are still low, but won’t stay low for long.
If you’re interested in looking for one of the top loan officers in the industry, contact Michael Quihuiz. If you don’t have an agent or you want to upgrade to an “All Pro” real estate agent, contact Kevin Khoi.
They are both Millennial’s best friend when it comes to getting the best loan deals and find a home that meets their criteria. Always up to date on technology and communication and more.
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