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  • Writer's pictureJared Jones

Can the Global Real Estate Inferno be Saved by Central Bankers?

Updated: Apr 9, 2021




The underlying fundamentals in this current marketplace look eerily similar in some ways to 2008. And we're talking about the housing market and we're talking about specifically cash-out refinances, and some of the latest trends we're seeing borrowers are possibly going back into this concept of using their home, like an ATM all over again. And today we're going to discuss what are the statistics about it saying about how it will affect the future value of real estate let's get into it.

So HousingWire just came out with an article that says underlying fundamentals are significantly different than what we saw in the early two-thousands, but they're hearing a lot of chatter about the boom and cash-out refinances. And the presumption seems to be that is destined to wreak havoc on the housing market and the economy at some point. Yeah. So Freddie Mac just put out a bit of data that HousingWire reported on. And obviously, towards the end of 2020, people are borrowing a lot of equity out of their homes. Now, this is still not where it was at the peak. I mean, obviously, you can see in the same graph that this raging area right here throughout the middle, you know, throughout 2006, 2007, uh, there was multiple more amount of money taken. I'm only talking like 50 billion on one. And, you know, from, from our last quarter and, and in 2007, you know, you, you can see by the graph, this is over a hundred billion in a single course.

You have double, the quarterly, uh, cash-out, refinance people taking cash out of their house. The reason why this is troubling is that the more money borrowed, it creates a couple of different effects. Uh, number one, it creates, uh, an increased payment. Okay. And number two, it creates a loss of equity. So you're reversing equity. You're basically borrowing against value. You're taking out more money, out of the home itself, and then conceivably, if there is trouble, you know, you're kind of creating two factors that are dangerous at the same time. You're increasing the value with the home is what's owed against the house that has to be paid off in the sale. If there is duress or some issue, you have to sell the house. But then you've also got the situation where the payment is jumped. So, you know, one might say this is dangerous. This is a sign of, of, uh, of issues of things to come. What do you, you know, would you agree with that?

Yeah, well, I, I would, I would say that the overall context of, of last year was, it's definitely important to take into, I mean, if there was a year to take out the money in an emergency, you is 2020, right? A lot of people lost their jobs. A lot of people had to move. A lot of people like it became a, just a primary issue to like pull out money to make the home nicer because now a lot of people had to work from home, like to when people needed money, they look to their home, they cashed out 80%, the value, which is actually, that's all the cash-out refinances. We'll let you go up to, they won't let you cash-out refinance a hundred percent of the value. They'll go up to 80% because their banks they're their money, they're experts at money, right.

So it's all being done safely. And I think taking into context the COVID market, I think it just makes sense. Something to note here is that, uh, people are sitting on a lot more than they were at the bubble. During the bubble at the peak of it, uh, they were at $4.6 trillion in total equity in the market, total equity, right? The whole market had that much money. It didn't even reach five right now. And in our market, we're sitting at $7.3 trillion in cash, routable equity, if that makes sense. Right. So we are sitting on a lot more money. So seeing a small bump in, in the overall scheme of things, we're actually, we're actually in a pretty safe, I mean, if there is going to be a crash, I don't, I don't want to see why, uh, since homes really aren't overpriced, we don't, we're not seeing the mortgage fraud that we saw, what we, I mean, yeah. And this is gonna go back and forth, but I mean, we're not seeing people qualify for homes that they're not, that they're not actually qualified to have to own. Right. And, uh, payments qualifying for payments from banks that they should never have had just like it, it happened just, you know, a decade ago. Right.

Well, so here's the thing, it's, it's fine to say that, lending is more stringent than it was before. That is true. Easy lending re uh, allows people to really, uh, kind of use the home as an ATM if you will. Yeah, but here's the thing, one thing that is a concern is there, the ha the home values are in a runaway train kind of thing right now. Like you have home values escalating beyond belief. So, so for instance, if you have some of these housing graphs, for instance, as you could look at anywhere in the United States, you could look at, at the central Florida housing market over the last five months, it's like space X, Elon Musk in the rocket going straight up like it's vertical. You look at Canada as vertical. You look at other countries, the housing markets are vertical.

Yeah, so what happens is what goes up seemingly must return to planet earth if you are now, lending on loans that are, you know, you're, you're creating new math, even if it's 80%, if your value jumps so fast that you have 10 50. I mean, like, I looked at some numbers, but just Lake in Orange County. And you had like, you know, $60,000, uh, price increase across an average, uh, section of the home. So you had like a 20% jump is like three 30 to three 90 across two counties I'm looking at. Okay. So that will immediately, like, according to lender numbers, they're going to pull an appraisal. If last year it would have appraised at three 30 this year prays three 90. You know what my point is, you're now taking, and you're creating a loan at a percentage a, of a value target value that is like red hot.

So that does create more of a risky loan. Okay. Now, now, yes, we are more conservative on the mathematical equations of how we're getting to give people money. That is true. Okay. I do not disagree with that, but, but, but I am saying that like, things are changing so fast. Here's, here's the challenge to think about how fast these ratios are climbing. Okay. So you have math going up on what a house worth math going up on what you can get landed on it because the mountain is higher, but that number is getting moved much faster than the actual rate of wages. So living wages are like, [inaudible] like this and the prices are going up and borrowing is going up. Yeah. That's not a good thing because what, what that says is, yeah, interest rates are down. So it does create a lower payment against the debt you're borrowing and all that stuff. But you are still increasing your payment. You're going to borrow some money out. People took 50 billion out last quarter that now means they all have higher payments. Now, if they were barred because they were in trouble or maybe, you know, there's a lot of people that were just adding on an office for themselves, right. A dance studio or a fitness,

Whatever. Yeah. They moved the parents in, they got to make the house more accessible for the parents to make sense of. What I would like to compare. And just to kind of like, kind of balancing out here is just to show you some raw data and we can pull this up on the screen, is in from 1985 to 2000, the percent of the median income needed to purchase a median-priced home, right? So that the average buyer making the average income on an average home, the price of the mortgage of the home was 21.2% during the bubble, it was 25.4% right now in today's market. We're at 14.9%. People are very comfortable with mortgage payments. Interest rates are low homes are still on the incline because we're in recovery from the crash. So we're making up for a lost time. Right now, the fact of the matter is, is we're actually qualifying people for homes that they're very, very comfortable paying right now.

And, I don't see any trouble here when we're comparing this to the market or even the actual historical norm from all data collected. We're at 14, 9.9% of the median income goes towards somebody's mortgage. That's pretty comfortable to me. If you think about it, that's one in seven, that's one-seventh of peoples that the median income going towards, uh, towards somebody's mortgage. I mean, people are, and people are wanting to qualify for more. I mean, bigger homes are more popular now. People are not just living at home. Now, now they're working from home. You know, they're starting their own businesses from home. Cause they're seeing that a lot of businesses failed, but now it record-breaking amount of businesses have opened because of that. This is an incredible comeback that we're seeing people are using their homes in different ways. And it's just incredible to see how, how America's bouncing back.

So listen to this. So, I was, I was actually doing some research on the topic of cash-out refinances, and actually, it's not easy to find a lot of data on exactly how much of this is turning over recently, but there is a guy named Nikolai [inaudible] who is with he's a Wharton finance professor. So Wharton business school. And I believe he's out of, uh, the university of Pennsylvania. And his co-author wrote a paper, they did a ton of research on refinances, going into housing crashes, say recessions. And, and what he said, well, let me read the article from, from Morton UPenn. He said it starts off by talking about how times passed people started using their home as an ATM. He said, that's what happened a decade ago when the housing market collapsed new research from the same guy, Wharton finance professor Nikolai Rubinoff shows that the pattern wasn't particular to that one recession in 2008, he says, looking back 30 years, Rusyn off his coauthors, found a cyclical pattern of refinancing before each recessionary period. Now, if that is true, right. And you stare at this graph, okay, let's all stare at the last recessionary pattern?

So you have, I mean, you had a bust here going into 2000, but then going into 2007, 2008, it just never stopped. And I mean, as you can see in the early two thousands, you had a trend according to Freddie Mac of cash out refinances, just taking off early. Now it took, you know, from 2002 to two, it took six years for of people, piggy banking, the house, key cash out, you know, ATM ch taking tons of equity out before anything happened. Okay. So you got to look at this, there's no question that in the last year, the climb has gotten much steeper. The volume of cash coming out has gotten much higher than it has at any point in the past 10 years, since that time. Okay. We're at record levels, post great recession. Okay. That that's true. But at the same time, if you look at this, there were steep climbs, then there were some more descents and then there was more money.

Okay. Yeah, so with all that being said, recession may not be around the corner. Like it may be, you know, we, we might be at the start of five or six years. It takes to actually formulate a bubble if it mimics last time, because clearly, you know, in the early two thousands, the market was, you know, felt the same, super hot lot of action going on a lot of, uh, appreciating a lot of, you know, the same experiment we're seeing in the marketplace right now, similarities. However, it did not disrupt overnight did not, did not fall.

Yeah. Yeah. There's a lot of fraud. And, and, and I mean, I think the last crash had everything to do with real estate. So, I mean, it's, it's tough to, to kind of make a one-to-one draw because people were just, they had adjustable rate mortgages, they were qualifying for two, three, four mortgages. You could write a mortgage up for somebody's dog. You know, it was nuts. It was the wild, wild West and mortgage lending. And so, I mean, it, it, it's tough to say because the market was going so crazy up. I mean, the market was not even the market appreciation was not as high was, was higher than when we're seeing now. So if we look at the numbers in 2002, the annual home appreciation of prices went up 8.5%, 2003, it was 8.7, 2004. It was 12.5, 2005. The market went up 11.4%.

These are insane numbers right now we're seeing, in 2017, it went up 6.42, then 18 4.8, 2019 4.7 last year, it was a big market. I went up 9.2%. Right. So, I mean, we're not seeing the level of appreciation that we did back back in during the bubble. And, and also like, like we were talking about mortgage lending standards are much higher. I can pull up this graph too. It shows the actual it's from the urban Institute. It shows the amount of risk that the lender takes that a product it actually has, uh, uh, in terms of offering it to the buyer. And in terms of lending standards, what is, is it below or above reasonable lending standards? Is it very hard to get a mortgage or is it very easy? And it shows that that number is actually going down right now.

It's actually getting harder to qualify for a mortgage just based off of lending standards, because I mean, you know, it just makes sense, you know, the home prices are going up and the bank's going to want to protect their, their investment. They don't, they don't want a bubble crash like the last time if that makes sense. So it's harder to get a mortgage, you know, I, I think we're in a much stronger market than we were then. And, we'll, we'll pull these, uh, these graphs up. So you folks have, uh, access to them as well.


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