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Signs points to housing market correction

The U.S. housing market is not about to burst, but several overheated markets could already be in the midst of what could become a “pretty significant” price correction, an expert from Carrington Mortgage Holdings said Tuesday.

“There is no housing bubble at the moment,” said Rick Sharga, executive vice president of Carrington Mortgage Holdings during a webinar hosted by the company on the state of the housing and mortgage markets. 

housecorrect“We have been able to offset home price increases with wage growth and relatively low interest rates, at least so far. I do believe we are looking at a price correction. I think we are already seeing a price correction in some markets.”

Sharga specifically mentioned Dallas-Fort Worth, Seattle, Orange County and the Bay Area of California as places where home prices have raced ahead and become candidates for a correction in prices. He said a true housing bubble would be defined by a 10-percent decrease in prices nationwide, and that’s not likely to happen. 

“We are seeing a normal housing progression,” Sharga said of the recent cooling off in a few markets, such as Seattle. “What happens is that demand ramps up beyond supply, prices go up,” he said. “Prices get to a certain point where they are not affordable to most buyers, but buyers decide not to pursue the homes anymore, and we start to see prices come down, and the buyers come back. That is, more or less, the normal cycle we are going through right now.”

Sharga predicted that home sales would pick up in 2019 and the economy would remain strong through the year, with a likely recession coming sometime in 2020. He said the next recession is expected to be mild, though, and will likely be brought on when the Federal Reserve raises interest rates one too many times.

“Almost all of the half dozen last recessions have been caused when the Fed made one correction too many, or just over tightened things,” Sharga said. “The most likely scenario is that the economy continues to grow. It looks like it might overheat a bit, and it looks like the Fed is going to raise rates in order to slow the economy down, and just overshoots the mark by a little bit.”

Sharga also discussed the rise of nonbank lenders and an emerging nonprime market, where the nonbank have been taking on riskier borrowers with lower credit scores. Carrington Mortgage is among the nonbanks that rolled out new loan products to reach down to subprime borrowers.

Sharga said the 2005 era subprime loans piled on a number of risk factors, such as bad credit scores, sketchy employment, high debt loads, teaser rates and overvalued properties, but today’s loans are different.

“In today’s market a borrower with a low FICO score will probably have to have a higher downpayment,” Sharga said.

“A borrower with a relatively low downpayment and an uneven job history will probably have to have higher cash reserves,” Sharga said. “So the lenders today are basically manually underwriting a lot of these loans. We manually underwrite all of them, and using the kind of common sense underwriting techniques that kept the mortgage industry safe for 100 years. So, if there is a risk in one aspect of the application, it is offset in other areas, and that is why these loans are less likely to wind up a foreclosure problem in years to come."


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