Is the housing market a bubble

When the Federal Open Market Committee begins its two-day meeting on Tuesday, it ought to consider whether its policies aimed to bolster housing may be having negative side effects.

With the market for new and existing homes red hot, the rationale for subsidizing the mortgage market has largely passed. Indeed, the Fed’s policies may be hurting home affordability as much as they’re helping.

Strong housing and mortgage activity argues against the Fed effectively subsidizing a sector that is near bubble territory. According to the Home Price Appreciation Index from the American Enterprise Institute, prices are up 12.6% in the 12 months through March, a doubling of the pace from a year ago. Among various markets, Phoenix was up 17.7% while the smallest gain was in the New York metro area with a 7.0% rise.

“Monetary policy that supports the extension of easy money when house prices are rising at record rates makes no sense. It’s one thing to misread the tea leaves of an asset bubble, but it’s another thing to be the enabler,” Carson writes.

One way to stop inflating home prices would be for the Fed to reduce its purchases of mortgage-backed securities. If that suggestion sounds familiar, it’s because Peter Boockvar made it in this column back in December.

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Where are home prices going? 3 areas of possible trouble in the housing market

Here’s what to worry about

Because of our extensive work as the largest quality control provider for lenders and others, we have a window on factors that all market participants should keep an eye on. Having performed post-close quality reviews on thousands of loans in the past year, we are seeing an increase in errors and a general sloppiness in the application, documentation and approval process. 

These errors may be due to the accelerated speed at which originators are processing loans, as they try to capitalize on the refinance opportunity created by record-low interest rates. The tenure of loan underwriting personnel also may be a factor. Well over half — 60% — of mortgage underwriters have been in their current position for two years or less. The average experience of a loan underwriter has plummeted, in large part a hangover from the last housing crisis, when many mid- and senior-level employees fled to other industries.

A second concern is the large number of people seeking to buy a home for investment purposes or who already own an investment property. If interest rates stay low, even more investors may be attracted to the housing market. There may also be a greater incidence of fraud, as some borrowers claim that their properties are owner-occupied to qualify for lower rates, while planning to rent the units. When the banks discover the fraud, borrowers will be faced with significantly higher interest rates. 

Alternatively, if the rental income expected by these owners (whether legitimate or not) fails to materialize, their mortgages could be headed for default.

Finally, while the Federal Reserve and other market experts believe inflation will remain well-controlled, a material spike in inflation, pushing mortgage rates toward the high single digits mortgage rates toward the high single digits, could have a devastating impact on housing. The bond market would be the first to react to inflation, as it erodes bondholders’ future cash flows. The resulting increase in bond yields would then be reflected in mortgage loan rates.  

 Still, it will be important to watch for alternative data – such as quality-control lapses or a rise in loan applications for investment properties – that may raise concerns that the air is escaping from the housing market. It would be especially worrisome if there were to be higher-than-expected inflation at the same time that forbearance ends and properties came flooding onto the market.

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New Study – Nearly Half of All Americans Missed Rent or Mortgage Payments Due to Covid-19

A new GOBankingRates survey found that a staggering 46% of Americans missed one or more rent/mortgage payments, and that 25% have missed more than one. And Erik Wright, owner of Chattanooga, Tennessee-based New Horizon Home Buyers says that the survey results are not surprising.

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