Low Interest Rates Fueling Housing Bubble Redeux?

These artificially low interest rates may come back to haunt us.  The Fed is artificially holding rates down at historic lows.  This may seem good for the housing market, but will we pay the price later?

Peter Schiff, EuroPacific Capital CEO, has been sounding this warning bell for quite some time.  Just like he had done in 2006 and 2007 warning about the pending housing crash, his warnings fell on deaf ears.  He has my attention this time around..

“In America, the problem is that interest rates are too low.

They have to go up. We can’t have an economy with interest rates at zero. If the Fed lets interest rates go up, we have to realize that we will have a deeper recession, we have to realize that banks are going to fail.”

Peter Schiff – in MoneyNews

America is an economy that is based on borrowing for consumption and borrowing to sustain a massive government that is spending a tremendous amount of money.”

“The reason that all the pieces haven’t collapsed already is because interest rates are very low and they are low because the risk is not properly perceived.

Peter Schiff - 

There are stories out there that housing affordability is going down because of limited supply of homes.  I believe this is focusing on the wrong problem.  The big problem is artificially low interest rates driving prices up which is great in the very short term, but what happens as interest rates go back to where they should be?  Or what happens if the interest rates skyrocket in order for the market corrects itself?

I played around with NAR’s Housing Affordability Index Model.  Using the Index’s formula and keeping Median Income and Median Home Price at June 2012′s level, I began to change the interest rates.

An HAI of 120 means the Median Household Income has 120% of income required to purchase the Median Priced home.

The calculation assumes a down payment of 20 percent of the home price and it assumes a qualifying ratio of 25 percent. That means the monthly P&I payment cannot exceed 25 percent of a the median family monthly income.

NAR Housing Affordability Index Methodology

June 2012, the HAI is at 178.4% with a Median Income of $61,061, Median Home Price of  $190,100 with Interest Rate at 3.8%.

By increasing the interest rate to 5%, the HAI drops 23.5% to 155.9.  The percentage drop goes down as interest rates rise (see charts below).

Since the Index can not go below 100, because that is 100% of the income to qualify for the median home price – the median price must change.  In a real market scenario, the median price would begin to drop before the index reaches 100, I would guess that is around the 120-140 range on the index.

The Index “breaks” between 9% and 10% interest rates.  From there I calculated where the median price would be close to 100 on the index.

  So the question remains – What would interest rates be without Fed messing with the market?  

I believe the housing market could handle 6% – 7% interest rates.  If interest rates were to “over-correct” or skyrocket to 10% to 14%, we could be looking at up to another 30% drop in home values.

If you think 10% to 14% interest rates are impossible, just look back to 1981 when rates hit 18.45%.  If you are old enough to remember, the Fed was fighting runaway inflation. (read more about Paul Volker’s policy).

What is your take on this?  Are we working ourselves into another housing bubble or this projecting to many what-if’s?

 

 

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Twin Cities Real Estate Market Update, Feb 13 2012

The January figures are in from Minneapolis Area Association of Realtors Weekly Real Estate Market Report for week ending February 4th 2012.  The Pending Home Sales are at the highest level since 2005.

The trend continues for the weekly report of decreased new listings and increased pending sales bring us the continued lowered inventory.

• New Listings decreased 6.7% to 1,236
• Pending Sales increased 35.8% to 888
• Inventory decreased 23.2% to 17,697

For the Month of January we are approaching some astounding inventory figures.  What strikes me from this report is the Month Supply of Inventory, we are down to 4.6 months supply of homes for sale.  We are approaching Seller’s Market territory.

There is a dynamic that Robert Shiller points out that real estate markets tend to stay in motion in one direction for long periods of time without ups and downs like the stock market.  We are seeing that here, these inventory levels would suggest we should be seeing price increases – but they have only slightly begun to materialize in the form of higher percentage of list price received.  If this persists we will likely see the trend reverse to price increases.  There are too many unknowns or “headwinds” yet to comfortably say this is the market recovery or just another bounce along the bottom.  Time will tell, but I will enjoy this good news for what it is:  we are going to have a great Spring Market.

For the month of January:
• Median Sales Price decreased 3.4% to $140,000
• Days on Market decreased 8.4% to 142
• Percent of Original List Price Received increased 3.4% to 91.2%
• Months Supply of Inventory decreased 35.2% to 4.6

Read Full Report from Minneapolis Area Association of Realtors

Above: Months Supply is at 4.6 month.  It hasn’t been this low since 2004-2006.  Under 4 month supply and we are in a Seller’s Market.

Above:  Look at the Percentage price increase on the right hand side – the trend is beginning to head upwards slowly – suggesting that the prices are stabilizing.  If you are a buyer you have probably been experiencing multiple offer situations in some areas of the Twin Cities and seeing  homes beginning to go over list price.  This is still spotty, but it is beginning to happen.   This will pose a problem going forward with Appraisals, Appraiser will have a difficult time coming up with Comps to establish values.  So a full reversal of the market trend will take time.

 

If you are a buyer: take a mental note of this chart.  The Affordability Index, if rates nudge up and prices begin to stabilize and increase, the housing affordability index will go down.  This may not last long…  So don’t wait too long!

 

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Twin Cities Real Estate Market Update, week ending Dec 3 2011 and month of Nov 2011

I have anxiously awaited this report, and I am pleased to see the results.  We are about to break the 20,000 mark for inventory as our inventory is now at 20,030 listings!  So Close!   20,000 is an arbitrary number I picked, it is a nice round number and we have not been below that mark since late 2004 and early 2005.

November’s Median Sales Price decreased 9.9% to $149,500, I am not overly concerned with that for a couple reasons:

A lot of the sales taking place are in the lower price brackets as investors are purchasing distressed properties which brings that number lower, once the distressed  inventory dissipates the median price should level back to historical perspectives.   (this has everyone guessing because of the “Shadow Inventory” which no one can seem to quantify..)

The other reason I am not overly concerned is that our inventory is way down, we are now at a 5.7 month supply of homes at our current rate of sales.  That places us in a Balanced Market by most people’s definition.  A Balanced Market will stabilize pricing.  We are beginning to see that in the Days on Market, which decreased 1.8% to 135.  Although if I were writing for a newspaper or TV news show, I would harp on the drop in median price figure to draw lots of attention to sell advertising…

In the Twin Cities region, for the week ending December 3:

• New Listings decreased 9.3% to 1,006
• Pending Sales increased 36.4% to 885
• Inventory decreased 22.9% to 20,031

For the month of November:

• Median Sales Price decreased 9.9% to $149,500
• Days on Market decreased 1.8% to 135
• Percent of Original List Price Received increased 1.0% to 90.9%
• Months Supply of Inventory decreased 30.5% to 5.7

Read Full Report from Minneapolis Area Association of Realtors

Here is the current Inventory, we are slightly above the 20,000 mark for inventory, by only 30 listings.  With Pending Sales up, and new listing most likely not coming on the market for the rest of the year – I think it is safe to say we will likely start 2012 below 20,000 houses on the market.

 

The Housing Affordability Index is at record highs.  For the Twin Cities, the median household income is 256% of what is necessary to qualify for the median-priced home – under prevailing interest rates…    This is a good thing, this is part of the market correction.

 

 

 

 

 

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Housing Affordability at all time highs

According to the St Louis Federal Reserve Bank’s data from the National Association of Realtors the Housing Affordability Index is at an all time high.   The index tracks the “affordability” of housing by degree a typical family can afford the monthly mortgage payment of a typical home.

Title:               Housing Affordability Index (Fixed)
Series ID:           FIXHAI
Source:              National Association of Realtors
Release:             Monthly Housing Affordability Index
Seasonal Adjustment: Not Seasonally Adjusted
Frequency:           Monthly
Units:               Index
Date Range:          1981-01-01 to 2011-10-01
Last Updated:        2011-12-06 9:01 AM CST
Notes:               Measures the degree to which a typical family can afford the monthly
                     mortgage payments on a typical home. 

                     Value of 100 means that a family with the median income has exactly
                     enough income to qualify for a mortgage on a median-priced home. An
                     index above 100 signifies that family earning the median income has
                     more than enough income to qualify for a mortgage loan on a
                     median-priced home, assuming a 20 percent down payment.

The above chart is the national stats, below is our local market Housing Affordability Index.  This is as of Nov 1, 2011 – we should be getting an update of November’s Affordability Index in a few days.  These charts do show us that from an “affordability” stand point, there hasn’t been any better time to buy a home.  (to clarify: the data above only goes back to 1980 – so maybe I should say there hasn’t been in a better time in the last 30 years to buy a home.)

 

 

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