We are in an interesting period right now where we are going to start seeing some of the year-over-year metrics shoot up, because this time last year we were beginning lockdown. Showings are up 49.5% – a lot of people getting out and wanting to look at home across the country. Purchase applications are up 39%. Pending deals are down slightly, while existing home sales and new home sales are both up almost 10%. The issue is in inventory – it is something that continues to plague the real estate industry, but, overall, we are seeing a very strong market as we head into the spring.
The other big news is the rise in interest rates. The average 30-year fixed, as recorded by Freddie Mac, is about 3.18% right now – a sign of the economy improving. Goldman Sachs is predicting about 3.75% by the end of the year, while others are predicting 3.25%.
One of the reasons for the lack of inventory may be that for the past 13 years, we are below the 50-year average of single-family housing units that have been completed. Permits are currently up right now, so builders are building, but costs are also rising.
Let’s take a look at home equity cashed out by refinances (in billions). $153 billion last year cashed out as cash-out refinances, while at the height of the market $321 billion was cashed out.
Tappable equity is defined as the amount available for a home owner to access before hitting a maximum 80% combined loan-to-value ratio (LTV). So, if you own a $100,000 home and you owe $80,000 on it, that’s 80% LTV. LTV in equity in homes is surging right now, because over the last ten years most have not accessed it. At the height of the market, tappable equity was about $5 trillion, and today we are at over $7 trillion.
Back then in 2006, 89% of the transactions were cash out refinances, because we were in an upward trending interest rate environment. Today, we are in a downward trending interest rate where 33% of the refinances are cash out refinances.
Today’s lending standards have changed. We know that in order to go and obtain financing for a home loan you’ve got to qualify and demonstrate the ability to repay.
A year ago, there were two to three buyers for every home sold. The intense competition has led to double digit price growth and properties selling in record time. To get back to a healthy supply of six months of inventory, an additional 2.7 million homes should be on the market for sale.
There were 4.1 offers in February – dramatically higher than where it’s been for the last several years. While this is causing bidding wars, driving the prices of home up, this is nothing like 2008.
Let’s break down the comparison of the two markets. Looking at annual home price appreciation, the years leading up to 2006 average annual appreciation was over 10% – just the average from 2002 to 2005. Today, we average 6.3% in annual appreciation. Big difference.
Now let’s look at the default risk in the mortgage markets to see lending standards are today, as compared to back then. The Reasonable Lending Standard produces a little bit of product risk, and in 2005 and 2006, there was a great amount of product risk. Today, product risk has been eliminated from the business. The other risk in lending is Borrower Risk, which is significantly less than it was back then. It’s harder to qualify for a mortgage loan.
In addition, single family inventory was rising in from 2004-2007, and prices were going up. Today, inventory has been going down while prices are going up. Economically speaking, back then, as the number of homes in the market were rising, the price was also rising. Today, the main drivers for price growth are extreme demand and low interest rates.