By Ray Birch
MADISON, Wis.—Home prices are rising quickly, and one economist is concerned a calamity still prominent in the rear view mirror might again be on the horizon.
CUNA Mutual Group’s chief economist, Steven Rick, cited housing market and consumer wage data for his concerns.
“I am worried about a possible bubble,” he told CUToday.info.
But Rick said the biggest concern he has for credit unions looking forward is that with a potential housing bubble forming, an economic slowdown happening and a possible recession down the road, now is not the time for credit unions to be chasing mortgage loan growth.
Noting CUNA forecasts call for a flattening of mortgage growth this year, Rick said, “Credit unions have become accustomed 10% to 12% mortgage loan growth every year over the last four years and many want to keep that going. Well, if the market starts to slow down and credit unions loosen their underwriting standards to keep business growth at the same levels, that could be a big mistake with the things that are likely ahead.”
Rick noted refi volume picked up over the Spring and Summer with the Federal Reserve rate cuts, but that kind of mortgage growth stimulus won’t be around this year.
“This year, credit unions need to just be willing to accept that mortgage loan growth won’t be as great and that this is simply the natural cycle of homebuying—homebuying is cyclical, and credit unions need to remember that,” he said.
Hitting Their Peak?
Rick believes home values are hitting their peak.
Home prices rose 0.4% in September from August, according to the Core Logic Home Price Index, and 3.5% year-over-year. The OFHEO House Price Index rose 5.5% over the last year ending in the second quarter.
“One way to measure overvaluation is to compare today’s home price-to-income ratio and home price-to-rent ratio to their historical averages. Historically, a house in the U.S. cost around three to 3.5 times the median annual income,” Rick told CUToday.info. “During the housing bubble of 2004-2005, the median price for a single-family home cost more than 5.1 times the median annual household income in November 2005. Today, that ratio stands at 4.4. This ratio is heavily influenced by interest rates, and when interest rates go down, the affordability of a house goes up, so people spend more money on a house,” noted Rick in a recent CUNA Mutual Group Trends Report.
Steve Rick, CMG
Where Risk is Highest
Rick said the cities at greatest risk for a housing bubble are, not surprisingly, in the U.S. Southwest and Southeast, which have seen strong populations growth.
“To name names, Dallas, Las Vegas, Fort Worth, Denver, Miami, Nashville,” said Rick. “The growth rate of home prices have been as high as 6% in some of these cities, and some a lot higher. The home prices are growing much faster than wage growth, which is about 3%.”
The Fed’s rate cuts last year are partially to blame for rising prices, suggested Rick, who said the rate reductions have led to more homes being purchased, reducing available homes on the market.
“This has helped to push up home prices, and not just in the cities and areas I talked about, we are really seeing prices rise quickly in cities across the country,” said Rick.
Déjà vu All Over Again?
Could lenders, including credit unions, make the same bad decisions that helped contribute to the housing bubble crash and the Great Recession?
“If a recession comes home prices will drop and you’ll have a lot of negative equity situations—which led to a lot of walkaway foreclosures 10 years ago,” he said. “We’ve seen it before about poor lending decisions, I guess we could see that again.”