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More Than Half Of American Homes Are Overvalued, CoreLogic Warns

Courtesy of ZeroHedge. View original post here.

A history of economic cycles dating back to the mid-1800s reveals a troubling outlook for today’s Central Bank induced bull market of hopes and dreams, which could be in the later innings.

It is quite evident that Americans have quit saving as their gig-economy jobs have left them in financial ruin – now being squeezed by the higher cost of living.

The charades of economic stability could continue for a little longer, with President Trump’s stealth quantitative easing program to Wall Street via debt-financed tax reform, which has induced a massive wave of more than $2.5 trillion in stock buybacks — a gift to corporate America.

No matter where one looks, the valuation of many financial assets are overextended, and new evidence today from CoreLogicshows this troubling picture very late into an economic cycle: More than half of U.S. residential real estate markets were overvalued in April.

Almost half of the US housing market is overvalued: CoreLogic https://t.co/gHrtR0dsDf pic.twitter.com/MRPKTYVY7Z

— FOX Business (@FoxBusiness) June 6, 2018

CoreLogic reports that residential real estate prices nationwide increased 6.9 percent year over year from April 2017 to April 2018. The firm’s Home Price Index (HPI) also shows a 1.2 percent rise on the month-over-month basis from March to April 2018. This has certainly sparked the debate of housing affordability across the nation with many millennials struggling to achieve the American dream.

CoreLogic Market Condition Indicators showed that 40 percent of the 100 largest metropolitan areas were overvalued in April, compared to 28 percent undervalued, and 32 percent in line with valuations.

The report uncovers a shocking discovery that of the nation’s top 50 largest residential real estate markets, 52 percent were overvalued in April.

CoreLogic’s methodology behind overvalued housing markets “as one in which home prices are at least 10 percent higher than the long-term, sustainable level, while an undervalued housing market is one in which home prices are at least 10 percent below the sustainable level.”

“Affordability” must increase ASAP or housing is in big trouble up here. It will happen, but not thru a wholesale credit easing like 2003. (Source: @MrMarkHanson)

Home Price to Income Ratio Near 2008 Bubble Levels

Historically a house in the US cost around 3 to 4 times the median annual income. During the housing bubble of 2007 the ratio surpassed 5 – in other words, the median price for a single-family home in the United States cost more than 5 times the US median annual household income. According to Mikey Maloney, this ratio is heavily influenced by interest rates. When interest rates go down the affordability of a house goes up, so people spend more money on a house. Interest rates have now been falling since 1981 when they peaked at 15.32% (for a 10-year US treasury bond).

“The best antidote for rising home prices is additional supply,” said Dr. Frank Nothaft, chief economist for CoreLogic.

“New construction has failed to keep up with and meet new housing growth or replace existing inventory. More construction of for-sale and rental housing will alleviate housing cost pressures," Nothaft added.

In a recent op-ed piece via The Wall Street Journal, Paul Kupiec and Edward Pinto place the blame on the government for creating another real estate bubble through “loose mortgage terms pushing home prices up.” They claim that mortgage underwriters need to tighten standards.

Home prices are booming. So far, 2018 has posted the strongest growth since 2005. “About 60% of all U.S. metros saw an acceleration in the rate of price increases through February this year,” according to Housing Wire. Since mid-2012, real home prices have increased 28%, according to data from the American Enterprise Institute. Entry-level home prices are up about double that rate. In contrast, over the same period household income has barely kept pace with inflation. The current pace of home-price inflation is increasing the risk of another housing bubble.

The root of the problem is declining underwriting standards. In April Freddie Macannounced an expansion of its 3% down-payment mortgage, the better to compete with the Federal Housing Administration and Fannie Mae . Such moves propel home prices upward. Because government agencies guarantee about 80% of all home-purchase mortgages, their underwriting standards guide the market.

Making lending even more dangerous, CNBC recently reported that “credit scores may go up” because new regulatory guidance allows delinquent taxes to be excluded when calculating credit scores. These are only some of the measures that “expand the credit box” and qualify ever-shakier borrowers for mortgages.

During the last crisis, easy credit led home prices to rise at an unsustainable pace, leading marginally qualified borrowers to stretch themselves thin. Millions of Americans’ dreams became nightmares when the housing market turned. The lax underwriting terms that helped borrowers qualify for a mortgage haunted many households for the next decade.

To sum up, the current unsustainable pace of overvalued home-price appreciation throughout more than half of the nation’s top real estate markets could soon hit serious resistance, as affordability becomes a more significant concern and the overall central bank induced bull market nears its later innings. So what does this mean for millennials who have recently purchased a home? You likely bought near the top.


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