First, some good news. Despite the meteoric rise in home prices, the real estate market hasn't ventured into housing bubble territory.
The bad news? Home prices are still going to decline, and mortgage defaults are likely to rise.
It's simply the nature of a cyclical market.
"It's interesting to watch the dynamics of the market. What we see is prices rise, sales activity slows down, prices weaken and then sales pick back up," said Carrington Mortgage Holdings Executive Vice President Rick Sharga. "It's the way a housing market is supposed to behave in a normal environment. But it's been so long since we've seen a normal environment that we forget how it's supposed to work."
While it's true that certain
"Even though CoreLogic's
CoreLogic found in comparing 380 metro areas that in January 2000, 6% were overvalued while 87% were at value. But by November 2006, 67% were overvalued and 32% were at value.
At the bottom of the market in March 2011, 7% were overvalued, 42% were at value and 52% were undervalued.
As of December 2017, there was a more even distribution among the three groups: 33% overvalued, 35% at value and 32% undervalued.
Speculative overbuilding, along with property flippers obtaining mortgages under false pretenses (like applying as an owner-occupant, rather than an investor) helped inflate the mid-2000s housing bubble, said Fannie Mae Chief Economist Doug Duncan.
While a recession in the near term seems unlikely, Duncan is concerned about whether the Federal Reserve can manage a "soft landing" of the economy.
Still, if there is a recession, expect mortgage loan defaults to rise. "Delinquency is highly correlated with unemployment. So anytime you have a recession, on a lag basis you will have a rise in delinquency and foreclosure," Duncan said. "That's a normal cyclical pattern. That's not evidence of a bubble."
Where prices have gone up, they're driven by economic growth and income growth, said Gagan Sharma, president and CEO of the mortgage servicer BSI Financial Services. "So that gives me confidence that things are moving well. But things could change if the economy takes a downturn."
He is more concerned about hot markets where home prices were driven on a reliance of a single-job sector like technology for Silicon Valley and Seattle, rather than rising rates.
"Most people have fixed-rate mortgages, very few people have ARMs. So if I am somebody who took a mortgage in the last five years, maybe I won't buy a new home, maybe I won't buy the next bigger home and I'll stay in my existing home a little bit longer than usual," Sharma said.
Since the start of the year, rates for 30-year fixed loan have
Whenever the economic downturn does come, people are in much better shape to deal with it, said Art Yeend, director of business development for the Barent Group, a due diligence firm.
A decade ago, the collapse led to a wave of strategic defaults by underwater borrowers. The economy is much healthier and loan underwriting has been tighter.
"How would [underwater values] impact the borrower's incentive to pay? It would be different this time around because they would be more able to pay," Yeend said.
The next recession is more likely to have a regional impact than a nationwide one. "Then the question will be how much does unemployment rise relative to house prices in those markets where unemployment rises more?" Duncan said.
