Lynn Effinger recently wrote an opinion piece here on HousingWire in which he surmised that we are in a housing bubble. He suggests that Fannie Mae and Freddie Mac (the GSEs), the Federal Housing Administration and the Federal Reserve are once again “setting the stage” for another housing crisis.
If anything, the overcorrection by regulators and trepidation by lenders has created an environment where borrowers and private capital are both left sitting on the sidelines, and access to credit remains quite tight relative to historical norms.
There is no question that the government remains a larger force in the housing market and is focused on protecting consumers. However recent actions by the FHA, the Department of Justice and the Consumer Financial Protection Bureau are more likely to constrain rather than expand the availability of credit.
They have levied significant penalties to hold lenders accountable and ensure that the mistakes made in the run up to the crisis never happen again. And as such, they have overcompensated and created an environment where qualified, responsible buyers are being kept from the home purchase market.
In fact, the homeownership rate remains near a 26-year low in this country, and credit still remains tight. The Mortgage Bankers Association's Mortgage Credit Availability Index reinforces the notion that although credit has improved marginally over the last year, primarily for borrowers seeking jumbo loans, it is nowhere near where it was during the housing bubble (Chart here: MCAI Longview).
Furthermore, the CFPB’s Ability to Repay/Qualified Mortgage rules have effectively eliminated the unsustainable lending products and instruments that substantially contributed to the 2005-2007 boom, including no-doc loans, subprime, negative amortization, extended term loans, balloons, ARMs with deep teaser rates, among others.
Housing markets are driven by underlying changes in housing supply and demand. While new construction has picked up, we remain just above the pace of single-family starts seen at the worst point in the 1990-1991 recession. And inventories of homes remain extremely tight in many markets.
Housing demand is driven by the job market and demographics.
With an unemployment rate of 5.1%, we are approaching full employment. In terms of demographics, the Millennial generation, the largest in history, is now moving out of their parents homes and into their own.
With the oldest millennials being in their early 30's, simple math dictates a tectonic sea change is afoot. More housing, both rentals and owner occupied, will be required to meet the needs of the approximate 1.4 million new households annually for the decade ahead.
Compared to the roughly 600k households formed annually during the recession, this huge increase will require new homes that will need mortgages. (Household Formation). And incidentally MBA's forecast calls for a slow but steady increase to meet this significant demand (Forecast).
It is not surprising that, given the depths of the last housing bubble, some are looking for an opportunity to predict the next one. A stopped clock is right twice a day. However in this case, the current regulatory environment and household formation trends reveals a different reality.