How’s The Market? – Is there a “Real Estate Bubble” like 2007?

Real Estate Bubble

In quite a few of the largest real property markets in the United States, the real estate market is at this point in its 5th year of expansion. Even if some areas still in the process of recovery, the most sizable markets from New York to San Francisco have essentially gone back to their 2006 or 2007 levels, or way past them.

As it is typical for all long-lasting growth markets, housebuyers get skeptical. They start asking themselves: “When will the prices drop so that I can make a bargain?”

The short answer just might be “not likely” but yet that’s a bit unforgiving. The better answer is that the discount they wish to have, the one from that historic period of ‘Home Buyer’s Fairyland’ (2008 to 2010), is certainly not going to return any time soon.

Most Buyer’s are unhappy by the low amount of listings, praying for a little sunlight in the dark. Let me explain why the sun won’t be shining quite as vibrant as Buyer’s would really like.

Carefree Lending Isn’t a Major Issue

The main cause for the housing disaster that established so many choices was the absurd lending practices of that time. I remember one tale told by the checking clerk at my nearby food market who with pride proclaimed she had invested in 3 houses with earnings too low to buy 1. It’s a sure bet that the lenders won’t be making that miscalculation ever again.

Therefore, the fake demand generated by loose lending practices is no longer available.

It was the exact same loose lending that stimulated excess construction. It caused an immense demand that building contractors were eager to fill. When property foreclosures escalated in 2006 and 2007, there were way more residences than people could actually buy. As a result, prices dropped like a falling knife. Pricing drops this large is something we will most likely never witness again.

Housing Starts Make a Difference

At the end of 2005, at the peak of the construction bonanza, housing starts were at 1.93 million units. The same number for 2014 was 1.08 million. The difference tells us how much housing was in the market then versus now.

Construction is just meeting demand, rather than going beyond it, or filling some imaginary demand 12 months in the future. That alone removes the potential for a sharp flood of listings that could trigger a market correction.

Having said that, buyers should take into account that, depending on where they search houses, the inventory will probably be, let’s say, “rather predictable”. Just look at how much new construction is in your local area lately, then put in the standard 3 to 4 percent inventory turn for any given location.

Unceasing Cheap Money Supply

The Federal Reserve has been struggling to lift interest rates for quite some time. The assumption behind that is that by raising the cost to borrow money, a smaller amount of buyers will be able to buy, which, in consequence, will slow demand. That will shift the housing market to the sellers who might just, for different reasons, will want to sell, which generates more supply. In that model of the market, prices usually will drop.

Albeit housebuyers really don’t want interest rates to go up due to the fact that it has an effect on affordability, even if interest rates climb 1 or 2 points, money is still affordable. We’ve been spoiled by 30-year loans at 4 percent when, for decades, people were really happy to get 6 percent.

Could soaring interest rates make buying easier and lead to more inventory? In some circumstances, but not to the extreme as during the crash years. You’ll notice a few buyers drop out of the marketplace, but certainly not the a huge number it would require to call it a crash.

My recommendation for housebuyers is to invest in their residences, not primary focus on speculation. They can as well follow the strategy of buying and holding for about 10 years, which, in many cases will work in their preference, or make investments / enhancements that will increase the value.

In any event, “wating for a crash” isn’t a strategy at all. With the exception of a disaster, there are no economic ingredients in place these days for a return of 2008.

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2016-10-15T00:20:39+00:00April 9th, 2015|

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