Forex Articles

Seven years removed from the recession, American homeowners are beginning to rebound from the havoc created by the housing crisis. Throughout history, the housing market has been a key indicator of financial stability and the real economy. Housing booms and bust are often reflections on the mortgage market, labor mobility and consumer spending. With interest rates near zero, at the moment, the real estate market has experienced a steady rise in new and existing home sales, prices and mortgages. Developments in the U.S. housing market have also been instrumental to gains in home improvement spending. In 2015, home-improvement retailers, Lowe's (LOW) and Home Depot (HD) have delivered better than expected results thanks to the housing market recovery. Despite what may seem like a modest recovery, there remain significant concerns that the recovery will be short-lived. Evidence would suggest that interest rates, a flood of foreign investments, income inequality and the same culprits from 2008 are re-inflating a housing bubble.

In December 2015, the Federal Reserve raised interest rates for the first time since 2006, and it will continue to do so throughout the following years. Simply put, interest rates have a direct impact on borrowing costs and by increasing interest rates; mortgage rates can jump as well. Long-term mortgage rates are guided by numerous factors, including the Fed's short-term rates, household savings rate, the budget deficit, and other indicators of the real economy. At the moment, the 30-year fixed mortgage rate is the primary choice for consumer home financing. With an increase in short-term interest rates, it is estimated that 30-year mortgage rates may hit 4.5% by the end of 2015 and up to 6% in the next two to three years. If mortgage rates are to climb from 4%, where they are currently, to 6%, that could mean home buyers in high-priced markets will likely spend a majority of their income on their mortgage or will be pushed out completely.

In recent years, foreign buyers have been flooding U.S. real estate and helping prop up the housing market. As the Chinese economy and stock market continue to blunder, Chinese investors have flooded metropolitan areas in the United States. In particular, foreign investors are purchasing high-end apartments in wealthier neighborhoods, pushing up home prices and sales. However, as the dollar continues to gain steam, U.S. housing is becoming more expensive for foreign investors. This has already begun to impact the influx of Chinese real estate investments, as overseas investors are starting to withhold investments in spite of their blundering economy.

Despite what might seem like a better outlook for employment, prices in the housing market are outpacing income growth. Over the past year, U.S. housing areas such as San Francisco are climbing up by 11%. As a result, the number of home buyers fell to 32% in 2015, representing its lowest level in almost three decades. With insurmountable student debt and other financial burdens, millennials have no other option than to rent or live with their parents. In New York City, renters represent 64% of the population with similar statistics across other major U.S. cities. Without young homeowners, this poses long-term challenges in the housing market. There is a lack of demand for current owners seeking to sell their homes when they retire. Housing has simply become less affordable today, and as home prices continue to increase, more investors will be forced into renting over home ownership.

Following the financial crisis, the process of obtaining a mortgage had been tightened. New regulations were created in the aftermath of the financial crisis due to the impact subprime mortgages had on the economy. However as the economy and real estate market continues to recover, U.S. banks have loosened their underwriting standards on new mortgages. In fact, in 2015, lending trends would suggest the credit risk had increased to its highest level since 2006. Fannie Mae and Freddie Mac are once again offering 3% down payment loans to first-time homeowners. Similar to 2008 conditions, the desire to expand home ownership is driving the decline in mortgage standards and re-inflating a corrosive bubble.

The recovery of the economy and the housing market over the past seven years has resulted in an increase in real estate sales and prices. Despite this, the very same culprits as 2008 and a couple of new ones are threatening the growth of the housing market. A tight supply and increasing demand have pushed housing prices up and out of the reach of many young homeowners. It hasn't helped that a lack of discretionary income, a pending increase in interest rates and an influx of foreign real estate investments are pushing millennials out of home ownership. As a result of all this and loosened credit restrictions, a downward spiral may be coming sooner than later.