Game Change

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The Latest or ig i nat ion ANALYTICS se r v ic i ng "Some markets do feel frothy" S e c on da r y M a r k e t a na ly t ic s —Celia Chen, Moody's Analyst Says Risk of Bubble Minimal Moody's lays bubble-related fears to rest in a July report. W ith headlines announcing rapid gains in home prices—some even detailing double-digit gains— Moody's Analytics says "there is little wonder that many fear a new housing bubble is developing despite the hard lessons of the Great Recession." However, Celia Chen, senior director of economic research at Moody's, dispenses these fears in her article, "Popping Housing Bubble Fears," published in the firm's most recent ResiLandscape report. Homes today are generally fairly valued or undervalued, inventories are low, and demand 70 | The M Report has not yet reached the frenzied level of the housing boom, according to Chen. Nationally, home prices are 22 percent below their 2006 peak, and prices in the West are 30 percent below their peak, according to Chen. Furthermore, the most drastic price gains are taking place in the same places that experienced the most significant declines during the recession, she reports. She admitted that "some markets do feel frothy" but explained that even overvalued markets have some market factors that will anchor prices before they float too far. In Phoenix, Las Vegas, Sacramento, and the San Francisco Bay area, price gains are double the national average. Prices in Phoenix are now overvalued compared to apartment rents but not incomes. Homes in the San Francisco Bay Area are "significantly overvalued." Inventory in these markets sits at no more than three months supply. Investors—which made up a significant portion of demand of late—are already pulling out of these markets, but "tight existing inventories and a slow pace of new construction will support house price appreciation at a moderate and sustainable pace," Chen said. In contrast to Phoenix and San Francisco, markets in inland California, Florida, the Midwest, and New England remain undervalued. Also, rising prices have not made homes unaffordable. "[E]ven with both house prices and mortgage interest rates rising, affordability is still quite high, and lenders are opening the spigot a crack," Chen said. If prices do decline, Chen said the result would be "less damaging to the broader economy" than the market burst in 2008. The National Association of Realtors reports 32 percent of home purchases are now cash purchases—a modest estimate, according to Chen. That means nearly one-third of purchases do not involve mortgages, "reducing the negative spillover effects of a housing investment gone sour," Chen said.

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