Mortgage Heroes Update – July 1st, 2021
Are we in a housing Bubble?
Video Transcript:
Andy Cruz (00:00):
Hi, mortgage heroes. This is Andy Cruz in Business Development, and this is your weekly video newsletter. This week, we’re going to talk about, are we in a housing bubble? But before we do, make sure you subscribe to our channel, hit that like button, and turn on notifications so that every time we drop a new video you hear about it first. Let’s jump right in. You might have been seeing or even hearing on a lot of headlines and conversation pieces and news pieces, are we in a market bubble? Is there a bubble? Are we going to have a crash? Didn’t we just have a real estate crash in 2008, 09′ and ’10? There are a lot of people talking about this issue, and there’s arguments that are notable on both sides. So, today we’re going to talk about what those arguments are, and then we’re going to talk about what we think is happening.
Andy Cruz (00:42):
Well, first, let’s talk about whether we’re actually in a bubble or not. So, by a traditional definition of a bubble, you’re of only going to know if it’s a bubble. Once it bursts and it happens and it blows up in your face. So, are we in one? You don’t know until you actually get out of it? The argument for being in a bubble is that we have house prices continuing to accelerate and escalate to all new levels every single month, and it’s been happening a month over month over month for now, almost an entire year.
Andy Cruz (01:12):
Now, that reaches a certain point of exhaustion at some time where people are unable to actually afford the prices that houses are going for. Right now, what we’re seeing though is that due to the low cost of borrowing money, the prices of homes continues to escalate. Therefore, we don’t really yet have an affordability crunch. Now, on the other side of this conversation, you look at what caused the housing crash last time.
Andy Cruz (01:37):
Now, one of the culprits of that was that they tried to get more people into being in home ownership. In order to do that, you had to reduce the standard for which you scrutinize people to qualify for a mortgage. That meant that they had subprime loans. That meant interest-only loans. That meant loan applications that were mostly blank because you had a no-income, no-job, no-asset type loan where your credit score qualified you for half a million dollars or 100% financing.
Andy Cruz (02:04):
And so back then when credit guidelines were really loose, it led a lot of people into the housing system that probably should not have been qualified, because what actually makes your mortgage payment every month? Your ability to pay it through income and your job; and when you’re stating or overstating what you make, you’re automatically putting yourself into a vulnerable position which eventually led to there being millions of foreclosures. Eventually, when people actually couldn’t pay for the loan that they had taken out, all those homes became foreclosures and flooded the market; and the bubble popped.
Andy Cruz (02:39):
What has changed since then? Well, as a result of that, the Financial Reform Act of 2010, actually modified a lot of the rules that came to lending and mortgages that we still have today. Lending has definitely become much more scrutinous, and you definitely go through a lot more of a screening process. You provide full documentation all the time now; pay stubs, bank statements, asset statements, verification of employment, verification of you paying your rent, good and clean credit. There’s all these things that should have always been part of the process that have now, just now always been part of the process.
Andy Cruz (03:13):
So, the argument for it not being a bubble really comes down to the ability of current homeowners to continue making their mortgage payments. This leads us to jobs. This leads us to income. This leads us to the ability to monthly make that mortgage payment regardless of the acquisition price of the home you bought. A lot of people who have bought homes in the last 12 months might have been buying homes at the current market high month after month after month, but they’re also getting that home at the current market low when it comes to the cost of money, really, really low mortgage interest rates.
Andy Cruz (03:47):
Now, when the monthly payment is in alignment with their actual ability to repay every single month and that has been matched by the screening process, the underwriting process, of actually fully qualifying people so that we reduce our loss mitigation, we reduce the risk of these becoming homes that hit the market and foreclosure, it’s really easy to see that we actually might not be in a bubble.
Andy Cruz (04:12):
So, what does all this mean? It really means that we’re going to see whether or not we’re in a bubble in hindsight, number one. Number two, whether or not a bubble forums and pops or forms and stays or doesn’t form at all will have a lot to do with employment, ability to repay, people that are in forbearance getting their loan program worked out or getting their loan modified; and there’s a lot of pressure on the mortgage services right now to help home owners retain their home ownership.
Andy Cruz (04:45):
I mean, what’s the outcome? If they have to walk away from their house, it’ll become a sale, whether it’s a foreclosure because they weren’t paying or if the homeowner can’t do a modification and they have to sell their home now while they have equity. Well, now we avoid it being a foreclosure, but now that person’s going to have to go rent, as opposed to owning their house. They will be renting with a little bit of money in their pocket because with all time highs they have equity, which is the difference between what you owe and what the value of the house is.
Andy Cruz (05:13):
I don’t think that right now, we’re actually going to see any market bubble pop because market rates are still really low. There’s still a lot of demand in the marketplace. You still have way more buyers than you do have sellers. Although developers are developing and breaking new ground in order to build new homes, you still have much more buyer demand than you do sellers; and that is going to keep prices where they’re at. Ultimately, when we look back at 2020 and 2021, we’ll see the tail of the tape and see whether or not the economic environment and the job’s environment specifically was able to support these new high highs matched with the new low lows of the cost of money to see whether or not this was the bubble or if it was not and it’s just the new normal.
Andy Cruz (05:59):
Well, thank you for tuning in this week. That’s our take on what’s going on, why it’s happening, and what might be coming up ahead. Be sure to send this video to someone you know and care about who could benefit from this information. And if you’re in a situation that you might need help or you need to bounce an idea off one of us here at the office, specifically pertaining to your home-ownership scenario, please let us know. Send us a DM, an email, a phone call, even. Let us know how we can help you make the most of real estate in 2021. Well thank you for watching. Hope you have an outstanding 4th of July weekend, and we will see you again next week.
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Rates & Fees Disclosure:
‡ The payment on a $300,000 30-year fixed-rate VA loan at 3.000% with a 80% loan-to-value ratio is $1,292.01 with 0 (zero) origination points due at closing. The annual percentage rate (APR) is 3.235%. Payment does not include tax and insurance premium impounds. The actual payment amount will be greater. By refinancing your existing loan, the total finance charges may be higher over the life of the loan. Some state and county maximum loan amount restrictions may apply. Appraisal fee of $600, Processing Fee of $895, Underwriting Fee of $795 included in APR calculations with borrower paying 0 (zero) loan origination points.
‡ Based on Mortgage Heroes internal data.
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