If new mortgage rules will prevent housing bubbles, prudent fence-sitters have no urgency to buy for fear of being priced out of the housing market.

Fence-sitters are potential homebuyers who for a variety of reasons are not ready to buy today — they could buy, and they may buy in the not-too-distant future, but for now, they contentedly rent and watch the market. Fence-sitters don’t buy for a number of reasons:

they are unsure about their jobs, they want the flexibility to move, they recoil against high house prices, they worry about future resale value, they can’t find the right property, they just aren’t ready.

The real estate industry hates homebuying fence-sitters. The goal of most realtor advertising is to knock people off the fence and generate urgency to buy homes — real or imagined.

realtors, loan officers, homebuilders earn income only when a transaction occurs, and they don’t care whether or not buyers are ready to buy, nor do they care if buyers sustain ownership. Transactions create income; therefore, the real estate industry wants more transactions, irrespective of how this may impact anyone else. Though this may sound harsh, based on the behavior of everyone in the real estate industry a decade ago, It’s obvious the real estate industry will sell homebuyers down the river for a quick buck.

In the past realtors were able to create false urgency by scaring fence-sitters with the possibility of being priced out of the real estate market forever. The housing bust appears to have rendered this bullshit realtor ploy permanently impotent.

In the past, there was a grain of truth in realtors fear-mongering about being priced out forever — it was possible to be priced out for a very long time. For those who turned away from the market bubble in 2004, it took five years for prices to become reasonable, and it took another three years for prices to finally become truly affordable and for prices to bottom. Five to eight years is a long time to wait out a correction.

The housing market finds stability after a bust (it’s happened three times in California) by retreating to safe mortgage loan products like the 30-year fixed-rate mortgage. After the market stabilized from the previous busts and began to heat up, affordability became a problem, so lenders offered unstable affordability products like interest-only mortgage, adjustable-rate mortgages, and the most toxic of all, negative amortization mortgages. This went on until lenders realized these unstable mortgage products cause borrowers to default, so they tightened credit.

Without lenders to inflate the bubble with affordability products, house prices crash, and the cycle begins all over again — at least until legislators passed the Dodd-Frank financial reform law and implemented new mortgage standards. As long as these rules remain in place, we should enjoy boring but stable house prices.

Rest easy, my friend.

With new mortgage regulations in place preventing the proliferation of toxic mortgage products, buyers no longer need to fear being priced out. House prices stabilized at prices affordable by local incomes, and these prices won’t move higher unless incomes go up or mortgage rates go down. A buyer three years from now will be limited to putting 31% of their income toward housing costs just like they are today.

For me personally, caps on debt-to-income ratios and banned affordability products gives me peace-of-mind that the window of opportunity for home ownership under stable loan terms will not close again. It removes the false urgency from the market that used to force prudent buyers to participate only when lenders weren’t inflating another housing bubble, and I think that’s great. It’s a fifth trait of the new normal in the US housing market.

May 9, 2016

Zillow CEO Spencer Rascoff discusses how the real estate market has changed since the housing crash and the different economic factors affecting homebuyers and renters today. Rascoff sees current national conditions as steady and “boring” — in a good way.

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