So what of our housing market? Prices are on the upswing, in some markets demand outstrips supply to the point that multiple offers are not uncommon. If housing can “unstick“ itself with an increased inventory, then what could possibly go wrong? What are the saber tooth tiger, and dire wolves of housing?
1. Housing Price Inflation without income growth: When prices of homes rise faster than incomes, buyers become priced out of the market. While home prices, year over year, are on the rise, average incomes are not keeping pace. This is not a good long-term trend. Cash buyers are currently 30% of the market, and cash buyers have no debt to income problems. These buyers are helping price some primary mortgage home buyers out of the market.
2. Demand light from first time buyers: Even with historically low-interest rates hovering in the 3.25- 3.75% range, we are hearing cries that mortgage lending is too tight, and that would be first time buyers are having trouble qualifying for a loan. Even in 2013, first time home buyers are running at a 30% level, lower than the historical norms of 40-43%. What happens when interest rates rise (as they inevitably will do) ? Unless we see good income growth, those that can’t qualify now will have a much harder time qualifying when mortgage rates are higher.
It would be wonderful if the good news being reported by many is actually good long-term news as well. But, in my view, the recent rise in home prices , without the corresponding increase in real incomes, and new home purchase mortgage applications being approved, then the truth seems to be more like the truth for our fateful Wooly Mammoth. Sometimes the initial problem becomes insignificant, though contributory, to the much worse problems to come.
Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial columnist for Benzinga.com and contributor for Businessinsider.com