Are we in another real estate bubble? If so, what will pop it?

Methinks real estate has topped. Been seeing the same signs around the neighborhood that popped up the late 2006 and into 2007. The flippers are desperate for the dumber money to take property off their hands.

Seems like the signs of this are everywhere. For example:

What are you guys seeing in your neck of the woods?

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Not sure about a bubble but interest rates around here are creeping towards 5% on a 30 year. That’s got to start having an effect on the market.

Totally unscientific little search I just did, but for the first time in maybe 6 years I’m seeing houses close below list.

House around the corner sold in 2015 for 350. I thought it was a tear-down but someone did a crappy flip and it sold in Dec 2016 for 425. Just closed for 460 after being listed at 475. 3 bedrooms, <1100 Square feet, no garage. Literally a shack.

Do you think that’s a broader market trend or a one-off since it was a crappy flip and a shack?

I see some concern about the yield curve going negative soon. When that happens, a recession usually follows within a year or so.

In the DMV, there’s a market imbalance mostly because there are so few starter homes. New construction is too high end for move-ups. Most of the starters were bought and kept as rentals, and no one is building starters since there is no land for affordable starters.

https://www.washingtonpost.com/news/where-we-live/wp/2018/04/10/here-is-why-you-are-having-so-much-trouble-finding-a-home-to-buy/?utm_term=.58c30c3d9a19

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I’m an expat living overseas, but I would like to move back to the US in the next 6-12 months. As someone sitting on the sidelines, wanting to buy a house within the next 12 months, this is a huge concern, especially given that purchasing a house is one of the factors behind the decision to relocate.

Interest rates are on the rise. The 3.5% 30 year mortgages will likely not be seen for quite some time.

Running some calculations on what may be a typical buyer:
Income: $50,000
DTI: 43%
Downpayment: $5,000

At 3.5% interest, this buyer can get approved for $261k.
At 5.0% interest, this buyer can only get approved for $231k.

The average person, whose information I used in my calculation is already tapped out. Even though in the past 12 months or so, incomes have been modestly rising, this is not going to make up for the difference in the interest rate increase when it comes to mortgages. The buyer in my example above will simply be priced out of the market. At some point, this will impact demand, which will cause prices to either stagnate. This scenario would be typical for a suburb where people commute 30+ minutes each way to work.

Urban housing will not be impacted nearly as much, for several reasons:

  1. Urban homeowners typically have higher incomes. Those at the top end of the pay scale have actually seen fairly decent wage increases recently.
  2. Those living in the city center then to have multiple sources of income besides their primary jobs, such as investments. If the stock market were to crash, this could cause urban house prices to decline
  3. Location. Nobody wants a 30+ minute commute to work, and there simply isn’t going to be any additional urban space for SFH.

This is like 2 years of 6% increase, which is the normal in many places (my own neighborhood included). Yes the numbers still seem like nonsense. But in my opinion, a few % change in interest rates is a very tiny contribution. It seems like it should be a larger contribution in states with lower property taxes, though – because the interest is a larger portion of the payment and has a larger effect when it changes.

Edit: also, adding an anecdote there’s a max of 1 house at a time for sale at a time in my neighborhood now. When there were 3 or 4 2 years ago.

To counter my earlier reply. Here are some differences between today and 2007:

  1. ARM mortgages have practically disappeared from the market. We are not in a situation where a significant number of home-owners face huge increases in their housing costs. Once you have bought in, you are immune to the drop in house prices as well as rate increases. This leads to the second point.

  2. Foreclosures. One of the drivers with the last housing crash was the large number of foreclosures that drove down housing prices. The same conditions are not occurring today.

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Those are indeed some differences. There are others as well, i.e. unemployment isn’t rising dramatically and there aren’t interest-only and zero-down poorer homeowners like there was last time.

It may be the case that the housing market has peaked in some areas and is due for a downturn, but the downturn would be much smaller than last time if this is the case, and it would depend on specific market forces in that local area a lot more.

Personally, I’m more concerned about a general recession. I think after a year of our new current tax rates (specifically the decreased corporate rates) we’ll see whether a general recession is likely. If the cuts failed, we’ll see one. If not, we won’t.

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Younger gen is getting in this market, and the folks who made mistakes last round who have learned their lesson (for the most part). I dont think regulations will be unwound enough to allow high risk mortgages. Though I agree recession would slow things down, but no “pop” as such.

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Agree, no pop or crash. Maybe a 10-20% drop in prices.

I think it might be a trend. Certainly in prime locations prices here are still rolling. But in those other areas even with low inventory sales are taking longer. 2 years ago everything went up on Friday and pending on Tuesday.

Why that is… I’m not sure.

And I certainly still hear scammy sales pitches from RE and Loan officers. “we can make your paperwork look good to the bank, don’t worry about your income qualifying” type stuff. So that’s still probably an issue that will come back around too someday.

I wonder about this… I just heard a local radio host talk about how they can go very high on DTI etc to get someone a loan. This was a mortgage show and the host generally seems to know what he is talking about. It made me wonder if we were going to see round 2 of the mortgage crisis again soon.

Anyone in that business who can comment?

I don’t know about “the business” or what they meant by “very high”, but the back-end DTI for conforming conventional loans did increase from 36% to 45% last year, and front-end from 28% to 33% IIRC.

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Interesting. The caller asked about 28% and 36%. The host explained that those were “old” methods and no longer used. He didn’t give a firm number but gave me the impression that he could and routinely goes much higher. He gave an example of 75% but explained that was a special case, investor, etc.

It probably was not a conventional conforming loan. I’m sure a private lender can set whatever rules they want for DTI and charge interest appropriately.

Here is what the Help Icon on the Zillow Affordability Calculator says about DTI ratios:

DEBT-TO-INCOME (DTI) RATIO
Enter the percentage of your income you are comfortable spending towards your mortgage. This number will also take monthly debts into account.

Typically your DTI should be 36% or lower to qualify for a mortgage. Certain loans allow for higher DTIs, such as FHA loans (43%) and VA or USDA loans (41%).

https://www.fanniemae.com/content/guide/selling/b3/6/02.html#DTI.20Ratios. I believe this is the primary source. No need to look at a zillow help icon (not primary source). Wikipedia also appears to have outdated numbers.

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SUB-PRIME MORTGAGES ARE BACK, BABY!

(But don’t call 'em that)

NBR

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What’s the DMV?

DC, and surrounding Maryland/Virginia suburbs