Five Reasons Why Real Estate is Overvalued and Headed Down Soon

#realestate #mortgagerates #economics #housingmarket

It’s fair to say there has been a lot of hype and regional bubbles in the real estate market over the last five years. From hyper explosive growth in Denver spurred in part by the marijuana and outdoor recreation sectors to mass biz-tech growth in Austin Texas due to favorable taxes and land plots. Yet part of this has been due to the pandemic mortgage rate decrease, the pandemic drawing out the value of single-family homes, detached townhomes, and/or anything but renting an apartment where contagion spread is more likely. Yet here are five detailed reasons why the real estate market is generally overvalued and headed down soon.

1) For new buyers and those looking to refinance, mortgage rates are still too high. Even with the recent decline from 7.31% to 7.20% on average for a 30-year fixed traditional loan (Yaёl Bizouati-Kennedy, Yahoo Finance, 09/06/23). According to the National Association of Realtors, the average monthly mortgage payment rose 85% in the past 19 months, from $1,212 in January 2022 to $2,246 in August 2023 (US Bank, The impact of today’s higher interest rates on the housing market, 08/30/23). Yet income has not gone up on average enough to get close to matching this payment increase.

2) Most of the people who wanted to move to other cities due to the mass work-from-home shift drawn out by the pandemic have already moved and secured mortgages in the lower 2.25% to 4.50% range. They have little incentive to move again considering higher moving costs and higher mortgage costs. Plus, many of them are now settled down with families and friends and are thus doubly less likely to move anytime soon.

3) Both new purchase and refinancing mortgage application numbers are at a huge 28-year low. “Mortgage applications declined to the lowest level since December 1996, despite a drop in mortgage rates. Both purchase and refinance applications fell, with the purchase index hitting a 28-year low” (Joel Kan, Mortgage Bankers Association, 09/06/23). Additionally, it is not likely to get better anytime soon and has already brought demand down. Slight mortgage rate increases or decreases will not do much to reduce this trend because income has not gone up enough and overall inflation has not decreased enough.

4) The millennial generation on average when compared to other generations is overly individualistic, spends a lot on fancy cars and vanity (YOLO), and does not save much. Thus, this generation has a higher-than-average number of people who will not qualify for a mortgage in this environment at present.?The next generation, Zoomers — although generally farther from the homeownership age, are not on track to save either. Both of these generations are on average far worse financial planners than previous generations. “A?Bankrate?survey observed that 54% of younger millennials and 46% of Gen Z respondents said their emergency savings had declined since 2020.?The survey also revealed?that millennials were more likely than other generations to have higher credit card debts than savings balances” (Megan Sauer, CNBC, 06/14/2022). What's the point in saving money if you are an Instagram model or video game streamer? There are no large-scale plans to solve anytime soon by either the government or private sector.

5) Although a study from April 2023 indicated that one-third of home buyers are cash buyers (Al Yoon, Insider, 06/08/23).?Yet this cannot logically last with inflation making most things cost more, estate financial transitions, and divorces on the rise taking more of that cash reserve. Cash buyers are running out of cash and there are fewer of them left after the housing boom and bid war from 2018 to mid-2023. The other issue with cash buyers is they need to prove where the cash came from. Sadly, a higher percentage of that is from fraud due to increased crypto money laundering, NFT pump-and-dump scams, and related ventures. With Western authorities cracking down on these fraudsters, their dirty money will less often be used to purchase homes.