March 25, 2019
Although Orion is headquartered in Southern California, we do business in many states and we have heard concern from borrowers through our broker clients about, “Is the real estate market in a price bubble, and will housing markets drop swiftly soon?”
Because we have experienced a very large increase in real estate prices in the past 5-6 years, especially where Orion lends, like the home price increases in the early 2000's, the expectation is that it will be duplicated. Comparing our current market to the market at the beginning of the century is not comparing similar actions and motivations of the buyers in the markets.
The pre-recession housing bubble was created by several factors. First, was the ease of financing enabling many people to purchase homes, or refinance current homes and pull out equity, well above the prices and mortgages they would normally be able to qualify for. Orion’s competitors who are no longer in business were doing loans that we would not do. Second were the motivations for much of the purchasing activity. The shift in purpose that we saw was people buying investments they would live in instead of buying homes. Third, once the market softened homeowners who were highly leveraged, in mortgages they could not afford once they adjusted, found it easier to walk away or sell at a loss than homeowners who purchased in conventional markets.
Today, Orion’s brokers are seeing a healthy foundation to the housing market. Changes in underwriting policies have ensured that borrowers have the income to debt ratios and credit history to afford their mortgages and many homeowners who have mortgages that are long term low fixed rates. Presidential administrations cannot eliminate business cycles, but the demand for housing from young adults age 22-35 is strong.
If/when there is a turn in the housing market and we see prices flatten, or even dip, there will not be the resulting sharp drop in prices across regions because of the solid foundation that has been built with qualified, well-motivated homeowners. With families owning homes they can afford to retain and having purchased with their hard-earned savings, Orion’s management believe a dip in the market will not create a panic-selling environment for any significant portion of the market to create a crash.