After a year of unpaid internships, hours of study to pass LSAT’s, being admitted in Florida’s State University School of Law, taking on debts to obtain a diploma in law, and being hired by a buffet in Orlando, Daniel finally has a decent salary for reaching his dream of buying a new home with his college sweetheart, Emily.
Purchasing a new home before reaching 30’s is undoubtedly an achievement, specially for the son of a couple of Colombian migrants who arrived in Florida during the late 80s fleeing from violence in their country. But despite Daniel’s academic efforts, it is his girlfriend who must take credit for the couple’s new bet.
A few years of experience in the real estate sector were enough to convince Emily that, even with a pandemic on board, this was the best time to buy a home. Banks were again offering loans at low interest rates and with all construction works soon to be stoped, household prices will skyrocket later, now was the time.
So they did it. Daniel and Emily bought a home in a middle-class neighborhood in Orlando, Florida, near to the main avenues and with lots of parks around; Southport, an area of houses with large porticos and yards, ideal homes for a family with a budget around $ 220,000 and $ 300,000.
The 1400 sqft house has a large garden, four rooms, two bathrooms, a kitchen with a dishwasher, and the novelty of solar panels on the roof that will save a few hundred dollars a year in the energy bill.
“I considered buying a house in 2018 by applying for a 30-year loan that I would pay at a fixed rate of 4% initially, but my salary at the time did not allow me to make that kind of expense. With the pandemic, Emily notice mortgage credits were dropping and convinced me to apply for a loan with the bank to buy the house, at a fixed rate of 2,5% on a 15-year mortgage, seeing that we both had stable jobs and our wages had increased, we took the loan,” Daniel explains.
Millenials are leading America’s Housing Boom
The first pandemic in 100 years hasn’t deterred millions of millennials who, like Daniel and Emily, risk buying their first home at the very low interest rates banks are offering.
During the 2008 crisis, the purchase and ownership of houses by young people collapsed, from 43% of people under 35 who owned a house in 2005, to only 34% by 2018. In the last two years, the percentage of young homeowners has recovered, reaching 38% in October.
Not only young people are buying homes, so far this year, applications for mortgage loans have grown by 50%, a rate not seen since the years prior to the 2008 crisis.
In its October 20 report, the U.S. Census Bureau reported that by September there were 1,415,000 new housing buildings, the approval of 1,533,000 permits for the construction of new homes, and the delivery of 1,413,000 new homes; a growth of 11.1%, 8.1% and 20.8% respectively.
As Emily intuited, the lockdowns caused the delivery of millions of homes to be delayed, as a result the price of american homes skyrocketed, growing 15% from March to September (an increase not seen before in U.S. House Prices Indexes).
This rapid rise in prices is already dissuading some people from buying a home, the Mortgage Bankers Association announced that in September new applications for mortgages decreased by 8. 4% which may be a sign that the home boom is loosing its fuel.
Housing prices are rising but not hitting any bubble…yet
Despite having suffered the sharpest drop in economic activity in 73 years, the application for mortgage loans in the United States did not decrease during the pandemic thanks to the lowest interest rates seen in the history of the Federal Reserve (FED), this new housing boom that contrasts with a weakly growing demand has raised concerns among various investors.
According to Ruchir Sharma, investor and fund manager at Morgan Stanley, although aggregate demand remains weak, the price of housing continues to grow, as does the price of stocks and bonds, Sharma says this is due to so-called easy money borrowed by the FED to the banks.
During the first lockdowns, the FED injected more than 2. 3 trillion dollars into the U.S. economy, far exceeding the stimulous of the 2008 crisis. This easy money package was injected into the economy hoping it stimulates the revival of the real sector, but today it is feared that it’s stimulating instead highly risky and speculative investments that take advantage of the low interest rates.
Although the FED cannot directly control interest rates for loans such as mortgages, auto loans, or personal loans, it can influence them by manipulating the rate at which it lends to commercial banks.
When banks borrow money from the FED at a lower rate, they transfer these savings by reducing the cost of loans to their clients. Lower interest rates tend to increase loans, and this means that the amount of money in circulation increases.
Investors like Sharma are skeptical of the record figures seen not only in households prices, but also in the stock market that had sharp rises while the real sector remains stagnant.
If real activity in the economy is not recovered, possibly due to a second stage of lockdowns, this injection of money will only have encouraged a wave of loans that would not have been made under normal circumstances.
Fannie Mae has already reported an 8% increase in the number of delinquent mortgages, this increase in the number of defaulters is mostly explained by the effects caused by the lockdowns.
At the moment it’s still too early to announce a bubble, there are no alerts in main macroeconomic indicators that warn of an imminent mortgage crisis. Still, several real estate agents in Florida said they have received full price offers “without having published the price of the home yet” and even had offers”up to $ 15,000 above the advertised price,” just as it was seen two years before the crisis of 2008.