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Are we in a bubble? Yes, no and maybe

by James F. McClister

Yun’s three “major” items

The three items Yun was referring to are: credit still being tight relative to pre-crisis years; low mortgage rates allowing people to buy homes without “overstretching their budget”; and the rate of sales versus supply.

Credit: Comparing today’s credit availability with that before the crash, Yun pointed out that the average credit scores for Fannie Mae-backed mortgages today are about 30 points higher than during previous bubble years; scores for FHA loans are about 40 to 50 points higher. Yun also explained that toxic sub-prime mortgages – the kind that were previously approved for borrowers with “strange credit scores and no documentation requirements” –  are “virtually non-existent.” It’s the same point Ethan Penner, managing partner of Mosaic Real Estate Investors, made during an interview with CNBC, in which he described the sub-prime loans being issued during the bubble years as simply “bad.”

Mortgage rates: Also during the bubble years, Yun explained, mortgage payments were eating up 25 percent of people’s income. However, with today’s historically low rates, and assuming a 20 percent down payment, mortgage payments take up only 15 percent of a person’s gross income. Though, that figure varies from market to market.

Supply: In talking about the nation’s current housing supply and the rate of sales, Yun described this combined factor as the “most important item” not being talked about by “new bubble theorists.” While the current market supports an inventory of “4-to-5 months’ supply,” which is concurrent with inventory in bubble years, the rate of transactions is much slower today. “Sales were at a frenzy back then,” Yun wrote.

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Comments

  • Alan Reynolds says:

    There was no nationwide ‘housing bubble” in January 2005. By mid-2006, home prices were much higher in Las Vegas, and hot spots in CA, AZ and FL. Soaring oil prices late 2007-early 2008 gave us a global recession, which killed housing, autos, furniture and other durables.

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