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» VISIT US ONLINE @ DSNEWS.COM 61 housing is more affordable today. Home sales and purchase origination levels are also well below previous peaks. Borrowers are well qualified, with average FICO scores of 745 for Fannie Mae versus fewer than 720 in 2006 to 2007. e nature of housing demand is different as well, with more potential homeowners and far fewer speculators in the housing market compared to the 2005-2007 period. Liu's research suggests that first-time homebuyers represented 37 percent of sales in the single-family housing market in 2016 versus 30 percent between 2005-2007. Rick Sharga, EVP of Ten-X, believes that what caused the last housing bubble wasn't an overheated economy—it was an overheated hous- ing market, fueled by bad lending practices and exacerbated by an almost insatiable appetite for mortgage-backed securities and exotic derivative products on Wall Street. is enabled lenders to sell off entire portfolios of bad loans to institu- tional investors. Borrowers who should never have qualified or who simply weren't financially ready for home- ownership were given extremely risky loans—of- ten with 100 percent financing, adjustable "teaser" rates, and even negative amortization—and sold overpriced homes. "When home appreciation stopped, interest rates went up, and loans adjusted, the whole house of cards came tumbling down," Sharga said. According to Sharga, none of those conditions exist today in a market where lenders are taking on virtually no risk at all. Only the most perfectly qualified borrowers can even get a mortgage loan today, and the Ability-to-Repay and QM rules established by the Consumer Financial Protection Bureau have set guidelines designed to make loans much safer. While economists may not foresee a housing bubble on a national level, according to Nothaft, bubbles may occur in localized markets, as they have in the past, if the right elements are at play. "ere are at least three features to look out for," Nothaft said. "e first I would call the 'af- fordability flag,' that is, we should expect that the typical monthly mortgage payment, monthly rent, and monthly family income be 'in balance'." In other words, if home prices rose so high that the mortgage payment is much greater than rent and takes a much larger percentage of income than usual, it will be hard to sustain such elevated prices. Speculative market pressures also factor into the equation. For example, if there is a rise in investor purchases and sales, especially by short- term 'flippers,' then that's a warning sign. ird, one should look for signs of increasing fraud risk, such as suspicious transactions or errors on loan applications. According to Liu, the city that stands out is Seattle, Washington, where prices are growing at 13 percent year-over-year. "It is the only city where home prices are growing at 10 percent or more," Liu said. "at kind of home price growth will be hard to sustain, and it tells us that the city is experiencing growing pains." FUTURE OF THE MARKET: PROCEEDING WITH CAUTION George Orwell, English author and journalist, wrote in his dystopian novel 1984, "Who controls the past controls the future." at's the way Americans must progress in response to current market trends. Despite the need for caution from what the industry has learned in the past, Seiler said he believes in "economic fortitude where people are being very cautious." Seiler continued, "When I say people, I mean builders as well, are being cautious. From the time for them to acquire land to getting building permits, to actually building the property. Here, they can build single-family homes in six to twelve months, but I think there's a lot of caution out there and not enough activity." As prices increase, there's a good opportunity for builders to make strong profits, so construc- tion will enter the market. It takes time, and even if people overcome their memories of the Great Recession, it will take time to actually come back in and build. Philip Davis, Founder of financial investments company PhilStockWorld, says the most alarming aspect of the future involves the packed portion of home prices and high rising property taxes. "It's gone out of control, and that's really throwing everything off, because we always talk about affordability," Davis said. Davis says that both rising tax rates and the increase in what people actually have to pay to be in a home are pricing people out of the market today. "It's something someone said to me many years ago that was the truest thing I ever heard in real estate, [that] people don't buy a home, they buy a mortgage," Davis said. "But at the time, when he said that to me, taxes weren't really an issue." While the housing market looks good and the banks are pretty solid at the moment, it is easy to put aside fears of another housing bubble. However, the banks have more capital than they had before, and they are buying mortgages. "But they're only buying very good mort- gages," Wallison said. "ey're not buying bad mortgages and holding them on their balance sheets. e bad mortgages are being sold to Fan- nie Mae, Freddie Mac, and the FHA." at's great news for those looking at the market from an economic point of view. But Wallison feels very strongly about the need for the government to implement better policies. "If we had good underwriting standards, we would have the same homeownership rate," said Wallison, "and, we wouldn't have the danger of a crisis." Growth in the U.S. has averaged less than 2 percent, according to Wallison—representing the slowest recovery from a recession and a financial problem like the economy had in 2008, where that was followed by a severe recession. "But in the eight years after that, we usually have a very sharp recovery," Wallison said. "We didn't." We may not be foreseeing a housing bubble 2.0 in the immediate future, but understanding the facts and proceeding with caution is crucial. Learning from the mistakes of the previous bubble and working to avoid those same missteps could prove key to creating a more stable future for the housing market and the U.S. economy. MSAs AT RISK OF LOCAL BUBBLES The Urban Institute examined the 37 largest American MSAs based on two factors: an affordability rating and the real increase in local home prices since their lowest point after the housing crisis. They then ranked the MSAs to determine which American cities might be at risk of a housing bubble. Here are the top American MSAs by "bubble-watch rank." San Francisco-Redwood City- South San Francisco, California: 1 (tie) San Jose-Sunnyvale-Santa Clara, California: 1 (tie) Miami-Miami Beach-Kendall, Florida: 3 (tie) Oakland-Hayward-Berkeley, California: 3 (tie) Portland-Vancouver-Hillsboro, Oregon/Washington: 5 (tie) Seattle-Bellevue-Everett, Washington: 5 (tie) COVER STORY INDUSTRY INSIGHT INDUSTRY INSIGHT INDUSTRY INSIGHT INDUSTRY INSIGHT

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