The Big Short

As Home Values Continue to Climb, Is There Another “Bubble” on the Horizon?

by Al Rex

Since the release of the movie The Big Short, I’ve had more than my fair share of questions from interested home owners, wondering if we run the risk of another housing bubble as home prices continue to climb. If you recall, the movie is based on a few “savvy” investors who placed large sums of money into options against mortgage-backed securities, basically betting against the U.S. housing market. As history reminds us, the bubble did burst, causing home prices to plummet – and these investors made billions.

“Are we poised for another bubble?” This is a legitimate question, since our current market is once again nearing the peak home values of 2006. However, this recent four-year rise in home values is very different from the euphoric rise of the early 2000s.

Housing Market in the Early 2000s
The meteoric rise in home values during this period was based on several concurrent factors, mostly driven by unregulated and risky lenders.

• Interest rates continued to drop, allowing home buyers to pay more for a home without higher monthly loan payments.
• Lending guidelines were very loose during those years. If you had a pulse, you got a loan.
• A good portion of these loans were five and seven year interest-only adjustable rate mortgages (ARMs), which had low introduction rates that accompanied interest-only payments.
• Some homeowners did several cash-out refinances during this period of growth, pulling out the excess cash as values continued to climb.
• Home builders could not keep up with the demand for new homes, making the existing resale home market extremely hot.
• As a result, home prices rose in Carlsbad by 149% between 1998 and the peak of 2006. In fact, the insane first quarter of 2004 actually saw average single-family home prices rise in Carlsbad by $107,000 in just three months! From $760,000 in April to $867,000 in July.
• The result – four million foreclosures occurred in the U.S. since 2007, and home values dropped significantly between 2008 and 2012.

Housing Market Since 2012
Fast forward several years, and you find a very different market today, with a steady rise in home values.

• Carlsbad growth in home values has been steady but not unrealistic, with values up 38% over the last four years (in comparison to the euphoric 149% from 1998 to 2006).
• The majority of the purchases are with at least 20% down, and if less than 20% down are accompanied by mortgage insurance. The majority of these loans are 15- and 30-year fixed rate loans.
• Home buyers applying for loans must show full documentation of income and proof of assets in order to qualify.
• Interest rates have remained at or near historic lows, and although an eventual increase is expected, all indicators point to a slow/deliberate increase.

So Where Do We Stand Today?
No one has a crystal ball, but the experts I’ve consulted with on this subject believe that if we do see a downturn in the housing market, it will be more of a mild correction and not a bubble. They believe the market should remain strong through the summer months and into the fall before we see an eventual flattening out. Barring a total economic melt-down, your home values should be solid for the next several years.