Americans are taking out the largest mortgages on record

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Americans are taking out the largest mortgages on record

Eric A.
Queens, NY · Member since 2014 · 153 posts · 64 votes
Article on Market-Watch: https://www-marketwatch-com.cdn.ampproject.org/c/www.marketwatch.com/amp/story/guid/E5127276-1A17-11E7-8755-9AB7B5C1C318 Spoiler alert: - According to the mortgage bankers association, the average size of a home loan is at the largest in the history of the survey, which goes back to 1990. - Larger mortgages reflect not just more expensive home prices, but also more leveraged ones. - The 20% down payment is a relic. The median down payment in 2016 was 10%. For first time homebuyers, it was 6%. - First timers and other buyers of less expensive homes are now more levered than they were at the height of the housing bubble a decade ago. - Back in 1990, the median mortgage was 3.3x the median annual income; it's now more than 5x Housing definitely frothy these days. And it definitely has to do with the recent period of persistently ultra-low interest rates fueling asset valuations to reach all-time highs everywhere. Anybody concerned that the impending "Trumplation" trifecta of fiscal stimulus (lower taxes, $1trn infrastructure spending, bank deregulation) will push interest rates higher very quickly, and push housing over a cliff?
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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y

Mortgage lending still looks solid to me ... if you want to see unsound lending practices that are about to run aground, look into auto loans:

http://www.valuewalk.com/2017/04/auto-subprime-loa...

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y

    Any measure of things involving money are going to typically be on an upward trend. Its called inflation.

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y
    Originally posted by @Eric A.:
    ...

    Anybody concerned that the impending "Trumplation" trifecta of fiscal stimulus (lower taxes, $1trn infrastructure spending, bank deregulation) will push interest rates higher very quickly, and push housing over a cliff?

    IMO, deal with the economics, not the labeling or politics. You can adjust to the former and there's nothing the REI can do about the latter :sigh:

    0Reply
  • Samir Shahani
    Investor · Easton, PA · Member since 2017 · 131 posts · 102 votes
    9y

    @OP It won't happen.  There are enough checks and balances in the system to avoid such a simplistic doom. 

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    People always say it won't happen and yet it always does. The American system does not have enough checks and far too many underfinanced low wage earners are still buying homes they can not possibly afford.

    Same applies for Canada, greater debt than we have ever had in the past.

    When rates go back to their historical average the market will drop. I hope.

    2Reply
  • Eric A.
    OP
    Queens, NY · Member since 2014 · 153 posts · 64 votes
    9y
    Russell Brazil obviously prices go up. But does inflation explain the median down payment being 10% and leverage ratios being stretched?
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  • Eric A.
    OP
    Queens, NY · Member since 2014 · 153 posts · 64 votes
    9y
    Jeff B. It wasn't meant to be political. I work on Wall Street. That's what everyone is calling it, love him or hate him.
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  • Eric A.
    OP
    Queens, NY · Member since 2014 · 153 posts · 64 votes
    9y
    Samir Shahani I must not have been very clear in my post. I'm not saying a lack of checks and balances in government will lead to some kind of simplistic doom. This was not meant to be political in any way. It's very well documented that the current administration and congress are focused on massive fiscal stimulus via aggressively lower corporate and personal taxes, infrastructure investment, and general deregulation, but bank deregulation in particular. In addition to this, the federal reserve has been telegraphing their desire to start reducing their massive $4.5 trillion balance sheet assets of treasury bonds and mortgage backed securities as soon as this year. All of these things are massively inflationary and point to higher rates and a steeper yield curve. Higher rates tend to affect impact people's ability to service debt and therefore pay high prices for housing. Just wondering how people are thinking about these things as it pertains to REI.
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  • Russell BrazilBusiness Member
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    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y
    Originally posted by @Eric A.:

    Russell Brazil obviously prices go up. But does inflation explain the median down payment being 10% and leverage ratios being stretched?

     Id be curious to see the historical data on it to see what the variance is

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  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    Mortgage lending still looks solid to me ... if you want to see unsound lending practices that are about to run aground, look into auto loans:

    http://www.valuewalk.com/2017/04/auto-subprime-loa...

    4Reply
  • Joshua Howaniec
    Contractor · Indianapolis, IN · Member since 2016 · 267 posts · 144 votes
    9y
    Its funny you posted this because I just finished reading The Big Short again last night. Im no expert, but i dont think that its fair to say that loan to income ratios and deregulations of banks will cause another collapse. One of the greatest reasons and trends that caused 2008 was fraud. From wal street to uncle Sam. No doc loans was an idea pushed by politics in order to allow the "poor and immigrants" the opportunity to live the dream without proper ddocumentation, dont ask me why. Then banks had to get rid of bad loans (why would they hang on to them) so they found a way to make money off of them. I dont want to oversimplify it, just stating my opinion based on my limited knowledge. Also not sayin a collapse wont happen, I just dont believe you picked up the right end of the stick.
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  • Andrew M.
    Atlanta, GA · Member since 2017 · 54 posts · 30 votes
    9y

    Well I can see your point. When you observe properties constantly being bid up 10%, 15%, or 20% above asking price by people who think they can pay almost anything for a property and it will still be worth more in a year then that's a tell tale sign of a bubble. Couple that with the decrease in down payments and when things go South many people will find themselves underwater.

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  • Sean Cole
    Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes
    9y

    Part of what makes that chart so scary looking is that it's not inflation adjusted.  It would look quite different if it were based on 1990 dollars.  Using the Inflation calculator here:  https://inflationdata.com/Inflation/Inflation_Calc...
    The $100,000 home in 1990 is $190,611.46 today.  I'm not arguing that the market isn't hot, it's just not as hot as the chart makes it look.

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  • Sean Cole
    Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes
    9y

    Here's a major factor in current housing prices:  Home Prices Rising.

    Inventory is at or near historic lows.  Sellers are afraid to list because they don't think they'll be able find a new house that they like or can afford.  The market isn't in balance from a supply/demand perspective, so it's not dissimilar from the jobs market today.  To get back in balance, at some point more sellers are going to need to list and more people that are out of the job market will have to come back.

    0Reply
  • Frank Jiang
    Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
    9y

    Mortgages: 300k in 2016 vs 100k in 1990 = only 4.3% CAGR, about 2% higher than inflation and fairly in line with wage growth over the same period so kinda meh.  The rate of increase has sped up in recent years but it's not exactly earth-shattering.

    Median down payment at 10 is  interesting, but sourcing and methodology are needed:

    http://www.prnewswire.com/news-releases/down-payme...

    @Russell Brazil Historicals and a few anecdotes for your curiosity.  This states that median down payment in 2016 for 30-yr fixed was closer to 16%

    http://www.realtytrac.com/news/mortgage-and-financ...

    Everything I read says that getting a mortgage right now should still be significantly more difficult than back in early 2000s and that the percentage of loans that are low/no downpayment is still low compared to anything that could be considered alarming.

    I still personally believe that there is hidden demand to drive up pricing even further.  Millenials are held back from buying homes because of additional debt burdens and unable to qualify for loans under current rules.  I think it's important to watch for political indications that deregulate lending (talk of such has recently been stirring).  That is what will truly lead to a large run-up followed by a collapse.

    2Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y

    @Frank Jiang great job on getting some historical data.  

    At least between 2004 and 2014 in that down payment chart we only see the average down payment percentage bouncing between 12.9% and 15.6% with the low in 2009 and high in 2013.  We see a drop from 04 into 05 & 06 as some exotic zero down products were hitting the market, and a dip again in 09 as the government did all they could to stimulate the market.  The variance though I think is generally not that significant, and granted this is only looking at a 10 year snap shot.

    So with such a low variance, I find zero concern with the average down payment as a percentage of the properties value.

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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    9y

    @Eric A. first of all, I don't think the chart in the story has been adjusted for inflation. Yes in 1990 the average home mortgage may have been $100K but that equals $191K today. Additionally, when you adjust for square footage, that changes it to $222K.

    Housing is frothy, which is exactly why higher interest rates are a good thing. Interest rates are used to used to help decrease spending to cool off an economy. Yes, lower taxes and more spending will put more money into consumers hands, but at the same time higher interest rates will cause more saving and less spending. It is a counter-balance effect. It is not going to push housing over the cliff, it will prevent it from going over the cliff.

    1Reply
  • Sri Voodi
    Investor · Woodland Hills · Member since 2016 · 82 posts · 33 votes
    9y

    Mortgage lending practices look solid to me as we speak. So I don't anticipate another 2008 in my life time. It was just greed and fraud that caused housing crash. I cant speak of other places, but in SoCal, there is severe housing shortage and inventory is very low. And I don't see people not moving to Socal or people moving out. So i think we are in a good shape. And I will keep invested in real estate

    0Reply
  • Chris Gibbs
    Investor · Portland, OR · Member since 2015 · 70 posts · 56 votes
    9y
    Originally posted by @David Faulkner:

    Mortgage lending still looks solid to me ... if you want to see unsound lending practices that are about to run aground, look into auto loans:

    http://www.valuewalk.com/2017/04/auto-subprime-loa...

     I currently sell cars in Oregon and I cant believe some of the loans that we get approved.  As long as someone has $500 and a job they can buy a car regardless of what the payment is.  I'm talking 25.99% loans, $500 per month payments for people that make 1500 a month GROSS.  

    0Reply
  • Sarah D.
    San Diego, CA · Member since 2015 · 273 posts · 226 votes
    9y

    @Chris Gibbs The idea of someone taking that loan is horrifying on so many levels.

    1Reply
  • Chris Gibbs
    Investor · Portland, OR · Member since 2015 · 70 posts · 56 votes
    9y

    I dont do it but I have also heard of salespeople forging pay stubs so they can be approved.  The lending in auto loans is super loose.

    0Reply
  • Meghan McCallum
    Specialist · CHICAGO · Member since 2015 · 680 posts · 650 votes
    9y

    The plan on investing in infrastructure isn't economic a choice as much is it based on deferred maintenance. Its a cost vs value play. Basically...they MUST. But, I'm afraid its the infrastructure that will line the pockets of the swamp in crowd before the infrastructure that actually needs it...like dams and bridges.

    When you reduce taxes for the wealthy and businesses when you are in as much debt as our country is...you don't have to worry about the poor suffering...you worry about the disappearance of the middle class ENTIRELY. This country isn't in a real estate bubble...its in a national economic bubble. 

    If only someone reputable like Robert Kiyosaki was saying this...then maybe people would listen.

    0Reply
  • Hersh M.
    Engineer · Carlsbad/San Diego · Member since 2014 · 285 posts · 97 votes
    9y
    Originally posted by @David Faulkner:

    Mortgage lending still looks solid to me ... if you want to see unsound lending practices that are about to run aground, look into auto loans:

    http://www.valuewalk.com/2017/04/auto-subprime-loa...

     Looks like default rates are going up for auto loans, student loans and also bank cards. Trouble for rent collectors (landlords) and mortgage premium collectors (banks)?

    http://nypost.com/2017/03/14/student-loan-defaults...

    http://www.marketwatch.com/story/heres-why-its-get...

    http://www.prnewswire.com/news-releases/bank-card-...

    0Reply
  • Will Barnett
    Investor · DFW, TX · Member since 2008 · 66 posts · 2 votes
    9y

    Mortgages that have been underwritten since 2009 seem to be rock solid.  We are in a low supply environment.   Is this low supply a result of a California like effect that has spread to other major metros nationwide?   Are builders not able to build small entry level homes because of high land prices due to limited available space and/or high permits and fees thus not being able to make a profit?  I'd like to get some feedback from anyone with experience in this field.

    0Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y
    Eric A. Just a few thoughts: 1. Inflation always pushes up those numbers. 2. Average home size is going up so (of course) prices are going up. 3. Odds are dual-income families (as a percentage) are also gradually inching up. 4. With interest rates having been in the 3's there was a "buy your forever home now" thought process. Personally, I think the 90/10 loan with rates in the 3's is far less risky than a loan with a teaser rate of 1% that jumps to 4% without income verification.
    0Reply
  • Jana CainPro Member
    Enrolled Agent · Richmond, CA · Member since 2016 · 225 posts · 148 votes
    9y

    I'm currently in escrow on my primary residence and I will say that the lending guidelines I must adhere to are exceptionally strict. I've had to jump through a lot of hoops to get my numbers just so (and with piles of documentation!). 

    So anecdotally, I don't see any of the same factors that led to the real estate bubble burst coming into play this time around. Again, this is just anecdotally.

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